Market Commentary
The Week In Review
Headline PCE | Grew 0.1% m/m (2.6% y/y)
Consumer Sentiment | Increased to 68.2
New Home Sales | Fell 11.3% m/m
U.S. stocks ascended to fresh all-time highs last week, buoyed by positive economic indicators. The U.S. Personal Consumption Expenditures (PCE) index for May remained flat month-over-month, aligning with expectations and signaling a continued deceleration in price growth. Meanwhile, French assets experienced pressure as the country approached its first round of snap elections. Notably, spreads on French 10-year government bonds over German bunds widened to levels not seen since the euro area crisis, while French stocks hit five-month lows.
The Week Ahead
July 1 | ISM (Institute for Supply Management) PMIs
July 2 | Euro area flash inflation and unemployment data
July 3 | U.S. trade data; Caixin services PMI, JOLTS (Job Openings and Labor Turnover Survey) , FOMC (Federal Open Market Committee)
July 5 | U.S. payrolls data & Employment report
Investors will be closely watching the upcoming U.S. payroll report to assess the continuation of recent rapid job gains, potentially bolstered by increased immigration flows. Of particular interest will be whether wage growth remains elevated, as current levels are considered too high for inflation to settle near the Federal Reserve's 2% target. Additionally, the second round of the French parliamentary election on July 7 will be in focus, given France's significant presence in the European corporate bond market.
Thought(s) of the Week
This week's focus is on the evolving market share of the S&P 500's top 10 companies. Historically, innovative industries have dominated the index's upper echelons, from railroads and oil to internet companies. However, the current concentration is unprecedented.
On average, from 1999 to 2015, the top 10's market share typically fell from 21% initially to 14% by year 5 and 10% by year 10. Since 2016, this trend has reversed, with top cohorts gaining share and subsequent cohorts starting at higher levels. Today, we're at a 50-year high with 36% of the S&P 500 concentrated in the 10 largest companies, primarily megacap tech firms seen as AI beneficiaries.
While this concentration isn't as extreme as the dot-com era (the tech sector's P/E ratio is ~30x now vs. ~70x in 2000), it warrants caution. Historical precedent suggests that maintaining such dominance is challenging, as evidenced by only one tech name from 2000's top 10 remaining today.
Conclusion
The investment landscape of 2024 presents a complex tapestry of opportunities and challenges. The renaissance in fixed income, driven by the fastest rate hikes in decades, offers attractive total income prospects. However, selectivity remains crucial, with preferences leaning towards European credit, high yield over investment grade and private over public credit.
In the broader market context, equities continue to be favored for risk-taking in the short term, particularly in the AI sector. However, the unprecedented concentration in the S&P 500's top companies serves as a reminder of the potential volatility inherent in such market structures.
As we navigate this evolving financial terrain, investors must remain vigilant, balancing the allure of high-yielding fixed income and concentrated equity gains against the backdrop of ongoing economic uncertainties and geopolitical events. The coming weeks, with key economic data and political developments on the horizon, will likely provide further clarity on the trajectory of global markets.
Ultimately, while the current environment offers numerous opportunities, it also underscores the importance of diversification, careful risk assessment, and alignment with individual investment goals and risk tolerance.