The general view on Wall Street was that the stock market rally would extend into early 2024.
But that hasn’t generally happened this year, with Nvidia (NVDA) alone accounting for roughly a third of the S&P 500’s gains this year.
While some have noted recently that positive earnings trends through the end of 2024 could still support the expansion, Morgan Stanley Chief Investment Officer Mike Wilson wrote in a note Sunday that downside expectations in economic data put a cap on the expansion going forward. Wilson highlighted Citi’s Economic Surprise Index, which measures the extent to which data exceeds expectations.
The index has been on a downward trend for much of 2024, hitting its lowest level in more than a year just now, dispelling the prevailing view that a better-than-expected economy would support market sectors outside of the biggest companies.
“Macro data has been generally weak, [year-to-date]”While many of the lower quality, cyclical names have struggled, some of the higher quality, mega-cap names have performed well,” Wilson said. “We see this as a sign that the market is becoming more focused on slowing growth and less interested in inflation and interest rates.”
That has investors flocking to companies that are thriving despite high interest rates and slowing economic growth. That’s not just limited to a few big tech companies, Wilson noted, but also to other stocks that have significantly outperformed the S&P 500 this year, including Eli Lilly (LLY), Chipotle (CMG), and Costco (COST). But that’s likely not going to extend to smaller caps right now, Wilson said.
Importantly, Wilson added, this environment can continue without an overall market decline.
“Interestingly, a narrow range does not necessarily mean poor future returns,” Wilson wrote. “Six months after a narrow range read, the average return for a market-cap-weighted index is 4%.”
