Stealth rally leads to another S&P record high

Markets are at new highs. Everyone seemed stunned to discover that we have moved to another historic high on the S&P 500.

Why? We were never more than about 1 percent from an historic high for the past few weeks. The action has been so muted, and on such light volume, that everyone forgot. Forgot what? Forgot that we have hit historic highs on an intraday basis nine times — in the last month!

Here's what's going on:

1. This is a broad rally. Yes, the S&P 500 and the Nasdaq are at historic highs, but the S&P Mid Cap 400 and the S&P Small Cap 600 are essentially at records as well (let's not quibble about a point or two).
2. The market is showing signs of classic rotation:
   a) Two sectors have shown especially strong momentum in the last couple weeks: technology and biotechnology. Why? Because technology earnings have been very strong. Tech companies so far have beaten estimates by 7.2 percent,the highest surprise margin of any of the 10 S&P sectors, according to Factset (the average beat for the entire S&P 500 is 4.2 percent).
   - This is resulting in a dramatic improvement in tech earnings overall. On June 30, tech was expected to post a decline in earnings of 7.4 percent for the second quarter, now it is expected to post a decline of only 1.5 percent. That is the biggest improvement of any sector. Software stocks have been particularly strong.
   b) Banks, notable laggards this year, may also join the momentum bandwagon.
   c) Prior market leaders like utilities, telecom and consumer staples are lagging.

Why the move up? Today's jobs report is the immediate catalyst, but again this did not happen overnight:

• Earnings have been okay, and there are fewer downward revisions in the second half than many feared.
• Crude oil, which gave everyone a scare a week ago, is showing stability around $41 a barrel.
• There's a lot more talk of fiscal stimulus,not just monetary stimulus, in Japan, the U.K., Europe and even the U.S. (there's talk of big stimulus here no matter who wins the election).
• Brexit effects have been contained so far.

What's the downside? We're still looking at 2 percent growth with productivity challenges. That's an issue for sure, but the ceiling may have moved up just a bit.