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Stocks are more in sync, less connected to fundamentals

Traders work on the floor of the New York Stock Exchange on January 13, 2016, in New York City.
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As earnings season begins, indications show stocks are getting more disconnected from corporate fundamentals — the latest sign of just how much the search for returns may be distorting markets.

The U.S. Federal Reserve's low interest rate policy and moderate global growth have kept Treasury yields near all-time lows. As a result, investors have preferred to buy stocks, pushing the S&P 500 to record highs with sectors moving in tighter correlation to one another, or more similarly, than they have in the recent past.

The average correlation between any given S&P 500 sector and the broader index rose to 84 percent last month, according to a Convergex report published Tuesday. That level tops the sub-70 percent correlation figures of the second quarter of this year, and approaches the 97 percent correlation of 2011, the note said.

"If you historically can outperform by picking the right sectors, this (correlation) tells you, you have to be more dramatically underweight or overweight," said Nicholas Colas, chief market strategist at Convergex.