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Dow jumps as Nvidia drops 6% and drags Nasdaq
A popular appeal on Wall Street for start 2024 it was for an extension of the stock market recovery.
But, to a large extent, this didn’t happen this yearwith Nvidia (NVDA) alone represents about a third of the S&P 500’s gains this year.
While some have recently highlighted that a positive earnings trend through the end of 2024 could still support a broadening, Morgan Stanley chief investment officer Mike Wilson wrote in a note on Sunday that negative surprises in economic data limit any upcoming broadening. Wilson highlighted Citi’s Economic Surprise Index, which measures how much better data was than expected.
The index has been bearish for much of 2024 and has just reached its lowest level in more than a year, dispelling a common narrative about a stronger-than-expected economy that supports other areas of the market outside of large companies.
“With macro data generally arriving more smoothly [year-to-date]many lower quality and economically sensitive areas of the market have lagged, while a shortlist of higher quality mega caps have outperformed.” Wilson said. “In our view, this is a sign that the market is becoming more focused on smoothing growth and less focus on inflation and rates.”
Therefore, investors bet on companies that prospered despite high interest rates and the slowdown in economic growth. Wilson noted that this extends beyond a few big tech names to other stocks like Eli Lilly (LLY), Chipotle (CMG) and Costco (COST), which handily outperformed the S&P 500 this year. But it probably won’t extend to small-cap stocks at this point, Wilson said.
Importantly, Wilson added that this environment can persist without the broader market falling.
“Interestingly, narrow breadth does not necessarily mean poor returns in the future,” Wilson wrote. “The average return of the cap-weighted index 6 months after narrow readings is 4%.”