Next questions for markets center on skinny rally and the chance of a Fed derailment

Published Fri, Jun 2 20234:30 PM EDTUpdated Sun, Jun 4 20231:54 PM EDT

It's almost as though the stock market doesn't care whether the Federal Reserve hikes interest rates another quarter point in June, skips a meeting and waits until July to decide again or signals an outright pause in its campaign to snuff out inflation via tighter monetary policy. No matter the outcome of the next Fed meeting or two, investors have largely decided the central bank is either done hiking rates, or close enough to being done to not make much difference anymore for stocks. After all, the Fed has raised rates 5 percentage points in less than 15 months, to the current 5.00% to 5.25%. Friday's blowout nonfarm payrolls growth of 339,000 new jobs in May, for example, was balanced by other details, such as an uptick in the unemployment rate to 3.7% and a small decline in year-over-year annual earnings to 4.3%, "suggesting that the Fed can possibly either hike one more time in June, and then be on pause, but that they … can slow down their rate hikes," said Megan Horneman, chief investment officer at Verdence Capital Advisors. "The underlying numbers in the report today show that the Fed can probably feel comfortable with maybe one more rate hike, and then pausing." By late Friday, the CME FedWatch Tool, derived from 30-day fed funds futures pricing, gave only about a 30% chance to another quarter-point interest rate hike at the Fed's June 13-14 meeting. The odds of a rate increase were higher, almost 70%, by the time the meeting after that wraps up on July 27. Narrow breadth Even more than the direction of Federal Reserve policy, however, what has been top of mind for stock market investors is the narrow leadership found in this year's 11.5% gain in the S & P 500 , and the fact only a handful of stocks are carrying the rest of the market on their backs. At least in the "go-go market" of the 1960s and early 1970s, there were the Nifty 50 . Nowadays, leadership has shrunken still further, to just the Magnificent 7 . The thinking at the corner of Broad and Wall was summarized in a report by Canaccord Genuity earlier in the week headlined, "Market breadth needs to improve or intermediate-term equity market correction looms." Or, as JC O'Hara, the chief market technician at Roth MKM said, expressing the same idea, "Mega Caps Can't Party Alone." That's a concern of Horneman's too. "The market's being really completely driven by AI, and any kind of tech-related names," she said. "Our concern is that's getting a little bit frothy there, and that could be a valuation correction," spurred by no other catalyst than "valuations get too high, and people start to take profits on it." Already, some investors are going public with their sales of at least part of their positions in Nvidia, for example, now that the AI-chipmaker has soared almost 170% just since the start of the year. Or at least those concerns were true until Friday's explosive rally, when almost six New York Stock Exchange issues rose for every one that fell, and all 11 sectors in the S & P 500 gained. Friday's advance carried the S & P 500 to its highest since Aug. 18, 2022, when the benchmark closed at 4,283.74. "I think this breakout has legs, but it won't be a straight line up and to the right," said Ross Mayfield, investment strategy analyst at Baird. "Overall, we like the market's set up — inflation falling, consumer resilient, labor market strong, earnings better-than-expected and Fed nearly done, but we expect volatility to make a reappearance in 2H23 as the recession debate heats up." Another favorable straw in the wind may simply be the fact the 11.2% rally in the S & P 500, just since the mid-March lows accompanying the failure of Silicon Valley Bank, is so hated and mistrusted. "Wall Street is teeming with low conviction bears," Bank of America equity strategist Savita Subramanian headlined a report Thursday. Subramanian highlighted a proprietary in-house, contrarian "sell-side indicator" that BofA uses, writing it's "slouching toward a 'buy' signal" on U.S. stocks. Sell-side strategists were only recommending a 52.5% allocation toward U.S. stocks in May, she said, just 1.1 percentage point away from the 51.4% advice that would be needed to trigger an all-out buy signal. That's the closest that indicator has come to offering up a buy signal on U.S. stocks in more than six years, Subramanian said. Week-ahead calendar Monday 9:45 a.m.: S & P Global Services PMI (May) 10 a.m.: Durable goods and factory orders (April) 10 a.m.: ISM services PMI (May) Tuesday Earnings: J.M. Smucker, Cracker Barrel, Calavo Growers, Ciena Wednesday 8:30 a.m.: Trade balance (April) Earnings: Campbell Soup, Brown-Forman, GameStop, Semtech Thursday 8:30 a.m.: Initial jobless claims (week ending May 27) 10 a.m.: Wholesale inventories (April) — CNBC's Alexander Harring, Fred Imbert and Michael Bloom contributed to this report.