Santoli's market wrap-up: Even parts of tech are weak Wednesday with chip stocks running out of steam

The S&P 500 saw a narrow bounce, largely driven by significant gains in Alphabet and Apple, despite broader market weakness and declines in equal-weighted indices. This occurred amidst solidified expectations for an imminent Fed rate cut, fueled by a notable decline in JOLTS job openings and dovish Fed commentary, which pushed Treasury yields lower. However, the market is grappling with whether these anticipated cuts signal slowing growth or are merely 'insurance,' as evidenced by cyclicals failing to respond positively, while robust corporate credit market activity provides a supportive backdrop for M&A and buybacks.

Analysis

The market is exhibiting significant divergence, with broad indexes held aloft by outsized gains in a few mega-cap technology names while underlying breadth deteriorates. Specifically, the S&P 500's stability is largely attributable to Alphabet and Apple, which rallied over 8% and 3% respectively on a favorable antitrust ruling, masking the fact that the equal-weighted S&P 500 declined by 0.5% and a majority of stocks traded lower. This dynamic unfolds against a backdrop of shifting macroeconomic expectations, as a notable decline in JOLTS job openings and dovish commentary from Fed governor Christopher Waller have solidified market consensus for an imminent rate cut. The key question perplexing investors is whether these cuts are 'insurance' for a stable economy or a reaction to emerging weakness. The muted reaction from banks and cyclical stocks to falling Treasury yields suggests growing sensitivity to the risk of a slowdown. Further caution is warranted from the semiconductor sector, where leader Nvidia is defending its $170 support level and the iShares Semiconductor ETF is failing at its recent highs, signaling a potential loss of leadership from a key growth driver. Despite these cross-currents and a sharp debate on the economic trajectory, strong corporate credit markets, evidenced by a surge in post-Labor Day debt offerings, provide a supportive underpinning for equity-positive activities like M&A and buybacks.

Key Decisions for Investors

• Given the market's reliance on a few mega-cap stocks for support, investors should assess portfolio concentration and consider the risk of a downturn if these leaders falter, as broad market participation is weak.
• Monitor upcoming nonfarm payrolls data closely, as a weak report could confirm fears of an economic slowdown and negatively impact cyclical stocks, even if it solidifies the case for a Fed rate cut.
• Treat the semiconductor sector as a key bellwether; a definitive breakdown in Nvidia below its $170 floor or the iShares Semi ETF losing its breakout threshold could signal a broader risk-off sentiment shift.
• While equity signals are mixed, acknowledge the strength in corporate credit markets as a stabilizing factor that could support corporate buybacks and M&A, potentially providing a floor for valuations.