Stock Market "Not Unhealthy" as Companies Outside Mag 7 Show Strength

Kevin Henkes highlights a significant market rotation out of mega-cap tech into the broader market (industrials, healthcare, financials), with the equal-weight S&P 500 hitting all-time highs. He notes a constructive macro setup with a lower dollar, flat 10-year yield, and crude oil down 3.1%, which benefits cyclical sectors. He argues that falling oil prices will soon show up in inflation data, potentially changing the Fed's policy path. The VIX is elevated but could drop if markets rally.

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Stock Market "Not Unhealthy" as Companies Outside Mag 7 Show Strength

SPX; WTI

dxy

You've got a lower dollar.

ndx

The rotation is out of the 'Magnificent Seven' (which dominate the Nasdaq 100) into the other 490 stocks. The S&P 500 is down for the week, implying weakness in large-cap tech.

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The equal-weight S&P 500 (which includes many small and mid-cap stocks similar to the Russell 2000) is making all-time highs, and the rotation is benefiting the broader market, including industrials, healthcare, and financials.

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Crude oil down another 3.1% this morning. Oil below $70.

yields

The 10-year is currently flat. It was lower, now it's flat.

Yesterday saw double-digit gains in memory stocks (Micron, Seagate, Western Digital, SanDisk), bringing optimism, and the Dow hit a record. Today markets are in the red.

Nicole
Kevin Henkes

The S&P 500 is down for the week, but the equal-weight S&P 500 is making all-time highs, indicating a great rotation out of the 'Magnificent Seven' into the other 490 stocks. Industrials, healthcare, and financials are benefiting.

This market showing red isn't as unhealthy as it appears. The rotation is continuing, and we're waiting to see when it ends.
Kevin Henkes

The macro setup is solid: a lower dollar, the 10-year yield flat after being lower, and crude oil down 3.1%. Lower energy prices favor industrials, cruise ships, airlines, and freight.

Anything that moves something from point A to point B benefits from lower energy prices.
Oil dropped below $70, down 3%, but the 10-year bond yield remains at 4.40%, not dropping despite the oil decline.

Nicole
Kevin Henkes

We are digesting PCE data that didn't show a break in inflation, but since it was dominated by energy, it will show a big drop going forward. Crude was near $100 20 days ago, now below $70.

Yesterday's PCE data feels stale. The drop in oil will change the whole dynamic of inflation, interest rates, and the Fed. The CPI and PCE prints this past month could be the highs for inflation.
Kevin Henkes

The Fed should look where the market is going, not where it is now. Fed members talk about current data, but we need to know where inflation is headed.

Using the Wayne Gretzky term: 'Where is the market going, not where it's at.'
The May annual core PCE hit 3.4%, a three-year high, but that might be the peak. JP Morgan expects no hike for the rest of the year, though Scott Bessent alluded to a possible 'tap the brakes' hike.

Nicole
Kevin Henkes

University of Michigan consumer sentiment data is soft data that traders pay little attention to, but the market reacts. Year-ahead inflation expectations dropped from 4.8% to 4.6% mid-month.

This soft data can be very political and regional, with a small sample size, so I'm not sure how much credence the market should give it, though it always pays attention.
Yesterday's economic prints: PCE hit a three-year high, GDP revised higher, durable goods orders plunged but less than expected, and jobless claims fell 12,000. The VIX at 20 is a crucial level.

Nicole
Kevin Henkes

The VIX all-time average is 15.39, so we are elevated. The VIX should be elevated as the market has come down and big names sold off. The key question is where it goes from here and when the rotation ends.

If we rally, the VIX could get pounded.

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