With major indexes hitting all-time high after all-time high, you would think investors would be cheering, screaming from the rooftops how bullish they are. You would think there would be signs of euphoria, like cash moving from money market funds into equity ETFs. However, we have seen the opposite behavior over the last 18 months as investors sought out secure, low-risk returns with interest rates increasing. At over $6 trillion in assets at the end of June, investors continue to plow into money market funds, attracted by the promise of a stable income in their view of an uncertain economic climate.
Money Market Assets are at All-Time Highs
Source: Bloomberg, ICI, as of June 30, 2024.
While flows into stocks are strong, they are far from reaching record levels due to ongoing concerns about inflation, geopolitical tensions, and potential recession risks. Another factor at play may be that today’s stock market remains a "winner takes all" environment, where the biggest companies are consistently outperforming smaller ones. Just like money market funds offer stability, mega caps have been offering the same, albeit in an unconventional way.
In today’s “winner takes all” stock market, large, well-established companies, especially the Magnificent Seven, are acting as defensive bets, especially with a murky economic outlook. This preference drives more capital towards these companies, boosting their stock prices and market capitalization, while smaller companies struggle to attract investment. One does not have to look much further than the race for the largest company between Apple, Microsoft, and Nvidia. These companies benefit from economies of scale, allowing them to operate more efficiently and reduce costs. This efficiency helps them maintain profitability and competitive pricing, further solidifying their market position. The Magnificent Seven companies have greater access to capital markets, enabling them to secure funding through equity and debt more easily than smaller firms. This has allowed them to invest in innovation, expansion, and acquisitions, which drives growth and market dominance. This has been exemplified in their net income growth compared to their less dominant peers. In 2024, the Magnificent Seven are projected to grow net income by 64%, while the rest of the S&P 500 is expected to grow by 29%.
Magnificent Net Income Growth
Source: Bloomberg, as of June 30, 2024. Data represents aggregated bottom-up net income estimates.
So, what gives?
The ensuing debate of whether the Fed has engineered a soft or hard landing for the economy has allowed the “winner takes all” environment to persist. Recent data points to a slowing of the U.S. consumer with May retail sales tallying a lackluster 0.1% month-over-month. While consumption is not yet close to recession levels, it is not very encouraging either. The trend in year-over-year retail sales is softening, but remains positive as consumers have become more price sensitive. Surveys of consumer attitudes have not provided much good news either. The University of Michigan Consumer Sentiment has declined for most of 2024, with both Current Economic Conditions and Future Expectations well off their highs from earlier this year.
Retail Sales Slowing
Source: Bloomberg, as of May 31, 2024.
This creates a positive feedback loop for markets where inflation has the potential to decline, boosting the case for rate cuts. With the market pricing only one or two cuts in 2024, interest rates are likely not going to rise or fall much more.1 Overall, we expect this choppy, but positive economic backdrop to add support for stocks heading into July, which is a historically seasonally strong month for stocks. While companies like Nvidia may be exhibiting signs of being near-term overbought, the fundamental backdrop remains favorable, especially for the Magnificent Seven. As for smaller companies, they will have their day in the sun, but we do not expect that to occur until we see changes in the macro backdrop. More likely is that we remain in a choppy economic environment that continues to support “winner takes all” stocks.
1 Source: Bloomberg World Interest Rate Probability, as of June 30, 2024.
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