S&P 500 pauses after making near 10-month highs

The narrow breadth and leadership in US stock markets has been a concern for several prominent Wall Street watchers for some time. As of late last week, the five largest companies - all megacap tech names - made up nearly a quarter of the blue-chip S&P 500. The benchmark stock index was up over 12% year-to-date recently, but the equal weighted index had gained only 1.5%.

Rotation is now being seen into small caps as witnessed by the recent out-performance of the Russell 2000. Energy, real estate and industrial’s led the way yesterday and new sectors out in front is a healthy signal for the strength of the bull market. Interestingly, small cap companies typically outperform during the early part of new uptrends. A rally led exclusively by mega caps is quite rare.

But rising Treasury and bond yields are generally not good for tech companies and growth stocks. These businesses tend to have high valuations based on future profits. But higher rates mean that earnings years from now are worth less today.

Regarding technicals, the recent high in the S&P 500 at 4,299 appears to be resistance having failed here a couple of times this week. Above here is the August 2022 top at 4,325.  The breakout zone around 4,200 is a major support as markets look towards a bonanza of risk events next week including Tuesday’s US CPI and the FOMC meeting a day later.