Big-Cap Tech Is Still King, But Interest Rates Are Signaling Growing Instability

On Monday, the market reverted to narrow big-cap technology leadership and narrow breadth. While the senior indexes managed minor gains, more than 5,800 stocks declined while just 3,400 advanced. New 12-month lows exceeded new 12-month highs.

This has been a very common theme for a while and many market players have been anticipating a shift in the action and a potential rotation into the many stocks that have been lagging the market for a while. There have been some signs of rotation but it has been very bumpy and inconsistent. So far small stocks have not been able to develop any sustained momentum.

The biggest problem for the rotation thesis is that there are still worries about interest rates and inflation. Big-cap technology is a safe harbor from high interest rates because these names have little debt and don’t have a problem raising capital. Interest rates can hurt P/E ratios, but that hasn’t been a problem for the Magnificent Seven, which has been viewed as a safe haven that is immune from valuation concerns.

Strategists from Goldman Sachs and Morgan Stanley are warning investors that a Trump victory — especially if combined with victories in the House and Senate — could result in greater inflationary pressure. There have been some signs of economic slowing that suggest that the Fed could move to a more dovish posture, but that is not taking hold.

Fed Chair Jerome Powell will be speaking on Tuesday morning at a European Central Bank forum in Portugal and may provide insight into the Fed bias. In addition, June payroll numbers will be issued on Friday, which will likely have an impact on interest rate expectations.

For now, the Magnificent Seven names remain the kings of the market, but interest rates and economic growth are increasingly unstable and the potential for a market shift is building.

At the time of publication, Rev Shark had no positions in any securities mentioned.