Market Comment - June

While most equity indices traded flat to slightly lower in June, the technology-heavy Nasdaq continued its meteoric rise, helping the massively concentrated S&P500 post solid gains. The dominance from technology has led to index rebalancing, with MSCI Indices in June and the S&P500 in July needing to increase the weight of technology stocks, which confirms the previously mentioned reflexivity trade we are currently witnessing. Subsequently, the past four weeks clearly deviated from the business cycle model we are tracking. Late-cycle sectors, especially materials and industrials, underperformed strongly, while early-cycle sectors, such as technology and discretionary, outperformed.

We doubt that we are wrong in our business cycle analyses and will give the market a little more time to adjust. The Nasdaq, according to our research, is trading in its maximum price target range. The same goes for the S&P100, representing the one hundred biggest companies by market capitalization. There are multiple factors that will have an impact on market volatility: earnings, politics, and interest rates. All will be sources for an increase in volatility in the coming months. While positive market seasonality lasts until mid-July, the volatility index (VIX) is showing positive seasonality from mid-July until October, especially during election years.

As previously mentioned, we believe that we are in the latest stage of the secular bull market that started in 2009. Secular bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. While, in the short term, market sentiment is turning slightly greedy, especially in technology, the real euphoria is clearly missing. How long the current bull market will extend is difficult to say. Let us measure the longest secular bull markets in history. The latest lasted 18 years, from 1982 to 2000, with the top-building process starting in 1999. Its predecessor lasted 19 years, from 1949 to 1968, with the top-building process starting in 1966.

What the current market cycle has in common with those previous ones is the fact that we saw high market concentration in indices like today. Obviously, there have been periods during which the market cap-weighted S&P500 deviated from the average stock returns, but historically, periods like these have reversed over time. Will this time be different? We should doubt it. A theory, which the market must confirm in the coming months, could be that we see a sector rotation that brings the late-cycle sectors into favor. A feasible option would be that the market starts a consolidation period lasting until September-October, which resolves in another strong leg up into 2025, where late-cycle sectors outperform.

Looking at Europe, which has a lower exposure to technology, the underperformance may well have an additional source: China. China’s domestic weakness has been a drag on the European economy. A weakening US economy, which is nothing unusual during a late cycle, may see Europe once again vulnerable to external forces. Even if we witness headwinds from US large-cap companies in the coming months, it will be difficult for Europe to become an outperformer.