Carrying on the theme “it’s different this time”…in light of a pending recession…why is the stock market doing so well?

The yield curve is inverted, interest rates are high, banks are failing, leading economic indications are predicting a recession, and yet the S&P 500 is holding above 4200.   What’s different this time is that a small cohort of very large companies are propping up the index.  Apple, Microsoft, NVIDIA and META are riding the wave of AI hype; yet 60% of the index is priced below their 200 day moving average.

The S&P 500 index is based on market capitalization and therefore skewed towards representation by the mega cap companies.   Comparing against an equally weighted index shows the disparity.  Year to date performance on a market capitalization basis is positive 10%, while on an equal weight basis it’s negative 0.3%.

The divergence is even more extreme when comparing the S&P 500 to the Small Cap Index.  Note in the below chart how the Small Caps have significantly underperformed since the March banking crisis.

As I see it, the question is- will AI hype raise the general market or will deteriorating economic conditions sink AI hype?

Stay tuned.

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