Despite the S&P 500 Reaching Record Highs, Rotation in Stocks is the Market's 'Lifeblood'

Beneath the surface of the S&P 500, the dynamics of the stock market are shifting, with the financial sector playing a crucial role in sustaining the current bull market as corporate earnings season progresses.

‍

"The bull market is thriving," says Adam Turnquist, chief technical strategist at LPL Financial. In an interview, he noted that the financial sector, particularly banks, is showing strong performance, signaling a breakout moment for the industry. On Friday, the S&P 500 achieved its 47th record close for 2024, marking a 23% rise this year. It has also completed its sixth consecutive weekly gain, the longest streak of the year, according to Dow Jones Market Data.

‍

Investors are keeping a close eye on the third-quarter earnings reports to gauge whether the market’s upward momentum will continue. Banks, which began reporting earnings earlier this month, are seen as an indicator of overall market health. Turnquist highlighted that cyclical sectors like financials and industrials have picked up the slack as investors started to question the leadership of technology stocks. This rotation between sectors, according to Turnquist, is "the lifeblood of a bull market."

‍

So far in October, the financial sector of the S&P 500 has gained 5%, outpacing other sectors and outperforming the broader market, which has risen 1.8% this month. Despite technology being the largest sector in the S&P 500, only around 50% of tech stocks are outperforming the market, while approximately 61% of financial stocks are leading the index, according to Turnquist.

‍

The coming weeks will be critical for corporate America, with large companies across various industries reporting their quarterly earnings. Companies like Boeing, Coca-Cola, General Motors, Verizon, and Tesla are among the notable names set to release their financial results. Tesla, with a market value exceeding $700 billion, is part of a group of megacap companies that some refer to as the "Magnificent Seven" due to their outsized influence on the market's performance. Other companies in this group, such as Nvidia and Alphabet, have even larger market capitalizations, with Nvidia's value exceeding $3 trillion and Alphabet's approaching $2 trillion.

‍

According to John Butters, a senior earnings analyst at FactSet, Nvidia and Alphabet are expected to be among the top five contributors to the S&P 500’s earnings growth for the third quarter. Nvidia, known for its AI chips, is projected to be the biggest driver of earnings growth year-over-year, followed by pharmaceutical companies Pfizer and Moderna, as well as chipmaker Micron Technology. Alphabet is expected to round out the top five contributors.

‍

The "Magnificent Seven" also includes Microsoft, Amazon, Meta Platforms, and Apple. Nvidia’s stock has skyrocketed nearly 179% in 2024, largely due to investor enthusiasm for artificial intelligence. However, many major Wall Street banks, including Goldman Sachs, JPMorgan Chase, and Wells Fargo, are outperforming some of the high-flying tech stocks this year. For example, Goldman Sachs has gained 37% year-to-date, while JPMorgan and Wells Fargo are up 32.5% and 30.8%, respectively. These returns surpass Apple’s 22.1% gain, Microsoft’s 11.2% rise, Amazon’s 24.4% climb, and Alphabet’s 17% increase. Tesla, on the other hand, has seen its stock drop 11.2% this year.

‍

Beyond the stock market, corporate bond spreads are indicating optimism about the U.S. economy. Spreads, which reflect the additional yield investors demand for holding corporate bonds over comparable U.S. Treasurys, remain tight. According to Arvind Narayanan, senior portfolio manager at Vanguard, the tight spreads suggest that while investors are mindful of macroeconomic risks, they do not believe these risks will derail the economy. Narayanan added that Vanguard does not foresee a recession within the next six to 12 months and that the U.S. economy seems to be "chugging along just fine."

‍

In the bond market, the yield on the 10-year U.S. Treasury note has risen 27.5 basis points this month, closing Friday at 4.07%, based on Dow Jones Market Data.

‍

Despite the strength in U.S. stocks, investors still have reasons for caution. Concerns about inflation, geopolitical conflicts in the Middle East, the war in Ukraine, and uncertainties surrounding the upcoming U.S. presidential election are all weighing on market sentiment. In light of these risks, some investors are turning to gold, a traditional safe-haven asset. George Milling-Stanley, chief gold strategist at State Street Global Advisors, pointed out that gold has reached new all-time highs in 2024, with the SPDR Gold Shares exchange-traded fund rising over 31% year-to-date, outperforming the S&P 500’s 23% gain.

‍

Although the stock market closed higher on Friday, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all posting gains, Turnquist warned that a short-term pullback could be on the horizon following the recent rally. However, in the long term, he sees little risk of the bull market losing steam.

‍