Morgan Stanley and Bank of America both warn: a few tech stocks support the market, small-cap stocks reveal the "fig leaf" of the U.S. economy
Morgan Stanley and Bank of America warned that a few tech stocks are supporting the U.S. market, while small-cap stocks reveal uncertainty about economic growth prospects. The Russell 2000 small-cap index has risen by 0.5% year-to-date, far behind the S&P 500 index. The market is increasingly focused on economic slowdown rather than inflation and interest rates. The relative performance of the Nasdaq 100 index to the Russell 2000 index, as well as the difference in the 10-year Treasury yield, indicate that the market is more concerned about the cyclicality of small-cap stocks. Morgan Stanley stated that fiscal spending and tightening interest rate policies will squeeze many companies and consumers out of the market. Investors have driven up the stocks of several companies performing well in this environment
According to the Smart Finance app, Morgan Stanley and Bank of America have stated that in the face of a softening U.S. economy, a few individual stocks are driving the market higher, indicating that investors are paying more attention to economic growth prospects.
Michael Wilson, Chief U.S. Stock Strategist at Morgan Stanley, stated on Monday that in addition to this year's unexpected downward data and the reduced number of stocks influencing market direction, many lower-quality and economically sensitive sectors are lagging behind in the market.
The Russell 2000 small-cap index has risen by 0.5% so far this year, far behind the 14% increase in the S&P 500 index driven mainly by tech giants such as Nvidia and Meta.
Wilson said, "In our view, this is a sign that the market is increasingly focusing on slowing growth rather than inflation and interest rates. Despite falling interest rates, the poor performance of small-cap stocks is a good example of this phenomenon."
Bank of America stated that the recent relative performance of the Nasdaq 100 index to the Russell 2000 index, as well as the difference in 10-year bond yields, indicate that the market is increasingly concerned about the cyclicality of small-cap stocks, with growing worries about growth. Ohsung Kwon, stock and quantitative strategist at Bank of America, stated in a report, "When economic growth is strong, the Russell 2000 index is closely related to interest rates due to refinancing risks."
In economic data, the U.S. Department of Commerce revised down the annualized GDP growth rate for the first quarter from 1.6% to 1.3%. Retail sales in May rose by 0.1% month-on-month, lower than expected, and initial jobless claims growth slowed. Kwon pointed out that the Bloomberg Economic Surprise Index has fallen to its lowest level since February 2019.
Morgan Stanley stated, "We believe the most important thing is that massive fiscal spending and tight monetary policy are squeezing many companies and consumers out of the market in an unsustainable way." Wilson said, "Investors have recognized this outcome and have driven up the stocks of several companies performing well in this environment."
Wilson noted that high-quality tech stocks and other stocks, including Costco (COST.US), Chipotle Mexican Grill (CMG.US), Intuitive Surgical (ISRG.US), and Eli Lilly (LLY.US), have high price-to-earnings ratios. "Unless the bond market rebounds with higher term premiums, or growth slows in a more meaningful way, we expect this narrow market performance to continue."
Kwon stated that Bank of America expects U.S. GDP to grow by 2% on a quarterly basis for the remaining quarters of 2024, which will provide a "favorable blonde background" for the stock market.
Morgan Stanley recommends combining large high-quality growth stocks with defensive stocks. Due to recent underperformance, stocks in the capital goods industry may perform well in the short term, with the industry's profit revision "decent"