The Headline Versus the Whole Market
What investors see in the headlines is not always what is happening across the entire market. A clear example: the S&P 500 was on track to be down for the week through its first four trading days, yet the equal-weight S&P 500 was simultaneously making all-time highs, having hit them the prior day. This divergence is the signature of "the great rotation" that continues to play out. The headline index, weighted heavily toward the largest companies, can show red while the broader market is healthy underneath.
The day's price action illustrated the choppiness. The prior session had brought excitement around Micron, with double-digit gains across memory stocks including Seagate, Western Digital, and Sandisk, lifting market optimism and pushing the Dow to a record. The following day, however, was a breather, with things turning back into the red.
Who Benefits From the Rotation
The rotation is moving money out of a small cluster of mega-cap leaders — the "seven, or a couple more" — and into the other roughly 490 names in the index. The clear beneficiaries are industrials, healthcare, and financials. Because of this broadening, a market showing red on the headline level is not as unhealthy as it may appear. The open question is when the rotation ends, because these moves historically do conclude at some point; that turning point, or a softening of the move, is what market watchers are waiting for.
The macro backdrop supporting this was described as fairly solid. The dollar was lower, the 10-year Treasury yield was flat (having been lower earlier), and crude oil was down another 3.1% on the morning. Lower energy prices specifically favor industrials and anything that moves goods or people from point A to point B — cruise ships, airlines, and freight all perform better when energy costs fall.
Bank Stress Tests and Oil Below $70
The bank stress tests came in as something of a relief, and that group was beginning to see more activity around dividends and buybacks as a result. Oil falling below $70 was characterized as somewhat of a big deal, down roughly 3% on the morning after having traded around $95 to $100 just 10 to 20 days earlier.
The "What Gives" Moment in Bond Yields
A puzzle was raised: even as oil collapsed from around $100 down to $70, the 10-year bond yield refused to drop, sitting stubbornly at 4.40%. Why would yields hold up amid such a sharp decline in energy?
The answer lies in inflation data digestion. The PCE report released the prior day did not show any break in inflation, which kept yields elevated. However, a CPI or PCE number that is dominated by energy is poised to show a big drop going forward. Yesterday's PCE data already feels stale, because it reflected a period when crude was up near $95 to $100, whereas oil is now below $70 — a move that has yet to show up in the inflation figures. When it does, it could change the entire dynamic of how inflation, interest rates, and the Fed's path are viewed. Everything could shift meaningfully.
A key argument followed: the CPI and PCE prints from this past month could turn out to be the highs for inflation. The Fed should adopt the Wayne Gretzky principle of skating to where the puck is going, not where it is. Fed members who are speaking tend to focus on where inflation stands right now and what they currently see, but the more important question is where it is heading — and that is what the market wants to know.
The Fed's Likely Path
Yesterday's inflation figure hit a three-year high — the May annual core reading of 3.4% — and that may well represent the peak. With that backdrop, the Fed has to wait. JP Morgan, for instance, was not expecting a rate hike for the rest of the year. The most that might materialize is a single "tap the brakes" hike of the sort alluded to by Scott Bessent.
The Consumer Sentiment Print
Attention turned to the University of Michigan consumer sentiment reading due that day. This survey comes out twice a month — once at midmonth and once at month's end — and this was the second of the two. The midmonth figure had actually been fairly favorable. The market was looking for a reading around 50.
This is "soft" data — sentiment-based — that many traders pay very little attention to, though the market still reacts to it. On the inflation side, year-ahead inflation expectations had dropped at midmonth from 4.8% to 4.6%. The data that had previously shown very low consumer sentiment alongside very high inflation expectations was beginning to soften. The caveat: it is unclear how much credence the overall market should give this soft data, which can lean very political and very regional and is drawn from a relatively small sample size — even though the market always does pay some attention to it.
A Roundup of Recent Economic Prints
The prior day's data offered a mixed picture beyond the headline PCE figure (the Fed's preferred inflation gauge), which hit a three-year high:
- GDP was revised higher.
- New orders for durable goods plunged, but came in better than expectations had feared — a notable wrinkle.
- Jobless claims fell, dropping by 12,000 from the prior week.
Watching the VIX
The VIX, the volatility or "risk" index, was singled out as worth close monitoring, with the 20 level seen as a crucial threshold that Wall Street and the CBOE watch carefully. When the market sold off the prior day and the VIX moved toward 20, it warranted attention.
For context, the all-time average for the VIX — since the benchmark shifted from monitoring the OEX to the S&P 500 — is 15.39. By that measure the index is currently elevated, and it has been elevated for a while as the market has pulled back, big-cap names have sold off, and the overall S&P has slipped off its highs. Given that backdrop, an elevated risk index is to be expected. The question is where it goes from here, which ties directly back to when the rotation ends or softens. On a Friday ahead of a holiday, the dynamic can cut the other way: if the market firms up and rallies, the VIX could get pounded back down.
Bottom Line
The headline S&P 500 was likely to finish the week lower absent a sizable rally, but that surface weakness masked genuine underlying strength — the equal-weight index at record highs, a broadening rotation into industrials, healthcare, and financials, supportive macro conditions from a lower dollar and falling crude, and the prospect that recent inflation prints mark the cycle peak just as collapsing energy prices prepare to pull future inflation readings sharply lower.
