(Oct 17): Stock traders kept driving a rotation out of the megacaps that have powered the bull market and into other corners of Wall Street.
Economically sensitive shares outperformed, with the Russell 2000 of smaller firms hitting the highest in almost three years. Most big techs fell, though Nvidia Corp jumped 3.1%. An equal-weighted version of the S&P 500 — where the likes of Apple Inc carry the same heft as Dollar Tree Inc — beat the US benchmark. That gauge is less impacted by the largest companies — providing a glimpse of hope the rally will broaden out.
“Investors may be looking to rotate away from large technology companies, which are widely owned and may have fewer clear catalysts going forward,” said David Russell at TradeStation. “With the election coming and the economy returning to balance, the long-awaited rotation away from megacaps to everything else could finally be at hand.”
Traders also continued to wade through a raft of corporate earnings. Morgan Stanley climbed 6.5% as traders and bankers joined the rest of their Wall Street rivals in posting better-than-expected revenue, fueling a 32% profit jump for the third quarter. United Airlines Holdings Inc jumped 12% as earnings beat estimates.
Billionaire Stan Druckenmiller said markets are pricing in a Donald Trump victory ahead of next month’s presidential election. In a Bloomberg Television interview, he said “you can see it in the bank stocks, you can see it in crypto”.
The S&P 500 rose 0.5% to around 5,840. The Nasdaq 100 was little changed. The Dow Jones Industrial Average climbed 0.8%. The Russell 2000 rallied 1.6%. The Bloomberg “Magnificent Seven” gauge was little changed.
Treasury 10-year yields declined two basis points to 4.01%. Bitcoin rose 1.9% to US$67,728.70.
“We recently upgraded small caps to neutral vs large caps after a persistent three-and-a-half-year period of underperformance,” according to Nicholas Lentini at Morgan Stanley and his colleagues. “This decision came on the back of the strong September jobs report and the Fed’s decision to deliver a 50 basis-point rate cut at last month’s meeting.”
For them to get outright bullish on small caps, leading macro indicators would likely need to reflect a clear acceleration in growth.
To Adam Turnquist at LPL Financial, small caps have been stuck in a consolidation range over the last few months as investors questioned the likelihood of a soft-landing scenario and path of monetary policy.
“With the growth outlook recently improving — underpinned by better-than-feared labour market conditions — and increased visibility into Fed rate cuts, the Russell 2000 has rallied off the lower end of its rising price channel,” he noted. “Recent strength in the banking space has further supported small caps.”
The S&P 500 has already set 46 closing records this year, and according to the trading desk at Goldman Sachs Group Inc, that rally is primed to extend into the final months of 2024.
Scott Rubner, a managing director for global markets and tactical specialist at the bank, estimates the US stock benchmark can finish the year “well north of 6,000”. According to his calculations of data going back to 1928, the historical median of S&P 500 returns from Oct. 15 to Dec. 31 is 5.17%. In election years median returns are even higher, just over 7%, implying a year-end level of 6,270.
“The equity market selloff is canceled, and a year-end rally is starting to resonate with clients shifting from hedging from the left-tail to the right-tail as institutional investors are getting forced into the market right now,” Rubner wrote in a note to clients on Tuesday. Professional investors are growing concerned about materially underperforming their benchmarks, he added.
Uploaded by Isabelle Francis