Dow jumps, drags on Nasdaq as Nvidia slips 6%

A popular call on Wall Street starting in 2024 is to extend the stock market rally.

But, by and large, that hasn’t happened this year, with Nvidia ( NVDA ) alone accounting for about a third of the S&P 500’s gains this year.

While some have Recently highlighted A positive trend in earnings through 2024 could support further expansion, Morgan Stanley Chief Investment Officer Mike Wilson wrote in a note on Sunday, with negative surprises in economic data limiting any expansion ahead. Wilson highlighted Citi’s Economic Surprise Index, which measures the extent to which data has come in ahead of forecasts.

The index tracked lower for much of 2024 and hit its lowest level in more than a year, debunking the general story of a stronger-than-expected economy supporting other parts of the market outside of large-cap companies.

“Macro data is becoming increasingly soft [year-to-date]Many low-quality and economically sensitive parts of the market have underperformed, while a short list of high-quality mega-caps have outperformed.” Wilson said. “In our view, this is a sign that the market is increasingly focused on smoothing growth. There is less focus on inflation and rates.”

So investors flock to companies that have thrived despite high interest rates and sluggish economic growth. That extends beyond some big tech names to other stocks like Eli Lilly ( LLY ), Chipotle ( CMG ) and Costco ( COST ), Wilson noted. But that doesn’t extend to small-cap stocks at this point, Wilson said.

Importantly, Wilson added, this environment can persist without undermining the broader market.

“Interestingly, narrower breadth does not necessarily mean weaker returns,” Wilson wrote. “The average cap-weighted index return after 6 months for the short-breadths is 4%.”

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