Put aside the artificial intelligence boom, and you’ll find that confidence in U.S. economic growth in the context of the stock market is nowhere near as strong as it appears.

Banks and industrial companies have performed dismally, eking out growth in 2023, while companies such as Tesla Inc. and NVIDIA Corporation Double and triple.Pessimism is evident in releases of major benchmarks that have weakened the influence of large-cap stocks, such as Equally weighted S&P 500 IndexSo far this year, the gain is a relatively paltry 4%.

Equally concerning is the performance of small-cap stocks, whose charts show worrisome signals that have been virtually absent over the past two decades.this Russell 2000 Already lagging behind the index 1,000 stocks with the largest market capitalization For the second month in a row, it had its second-worst annual performance since 1998.

While this year’s top-heavy stock rally is often viewed as a description of the tech sector’s all-out strength, it has another, less optimistic explanation. Aside from a small group of AI winners, much of the market remains unconvinced that the economy will make any progress.

“There are still cracks beneath the surface of the market — you can’t see the underperformance of everything from financials to broader small-cap stocks,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. Breadth.” “Frankly, it looks more like a bunch of churning in the market, with the top players doing the best but being relatively weak behind the scenes.”

All of this is reminiscent of the underperformance of small-cap stocks in 2021, but goes against many analysts’ expectations: Historically, these stocks have outperformed during recovery periods and sold off during periods of stress. Given that most of their sales come from the United States, investors look to them for clues about the health of the economy. This time around, while forecasters are more confident that the Fed will deliver a soft landing, the market’s weakness is far from unanimous.

The S&P 500 fell 0.2% for the week and the Nasdaq 100 fell 0.5%. Meanwhile, the Russell 2000 index fell 0.2%.

As the broader market rallies on the back of tech giants, many smaller companies are not participating in the rally. Liz Ann Sonders of Charles Schwab & Co. point out Eleven months have passed since the S&P 500’s October lows, but only about 40% of Russell 2000 stocks are trading above their 200-day moving average. In comparison, when the market came out of the 2020 trough, more than 90% crossed the threshold in the same period, she said.

While many economic indicators were strong, a measure of inflation run Monthly growth in August was faster than expected. Economists surveyed by Bloomberg believe the Fed will raise interest rates again this year and for longer than previously expected.

Meanwhile, a string of stronger-than-expected reports in recent months on everything from consumer spending to residential investment has shown new momentum and some forecasters are reassessing their economic forecasts, even predictions of a recession.

Among them was Goldman Sachs Group Inc., which lowered its 12-month probability of a recession by 5 percentage points to 15%.The Atlanta Fed’s GDPNow model, a real-time compilation of economic reports that changes as data are released, has weakened slightly, suggesting that U.S. gross domestic product will expansion Growth in the third quarter was 4.94%. This is down from the 5.57% forecast the previous week.

“The stock market is sniffing out some future data that is not showing us right now. Remember, most data, such as retail sales, are retrospective. Matt Maley, chief market strategist at Miller Tabak + Co Said: “The stock market is forward-looking. “With interest rates at 15-year highs and student loan forgiveness set to end in a few weeks, it’s starting to look like consumers won’t be offered the kind of tailwind they’ve had for much of this year. “

read more: The mighty US consumer is about to hit a brick wall: MLIV Pulse

ends in Bank of AmericaStrategists led by Michael Hartnett are telling defensive-minded clients to buy assets such as regional banks and small-cap stocks that have priced in a rapid decline in economic growth.

“Investors should consider long ‘hard landing’ assets as they have less to lose in a recession and have significant upside in the absence of a recession,” he wrote in a note.

— With assistance from Augusta Saraiva and Kyungjin Yoo

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