Market Leadership Breaks As Valuation Pressure Intensifies
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Stocks fell sharply, even though the S&P 500 finished the day down just 85 basis points. Technology and software stocks were hit the hardest, pushing the Nasdaq 100 down more than 1.5% and dragging the XLK ETF lower by over 2%. The damage in the software sector has been undeniable, with some stocks now trading below their 2022 lows. Adobe (ADBE), for example, closed at its lowest level since October 2019.
In some respects, this is similar to the transition from 2021 to 2022. The key difference is that the Federal Reserve is now cutting rates, whereas it was raising them at that time. Oil was also surging toward $100 at the time, whereas today it is struggling to hold above $60. Still, it is easy to see that the Software ETF, IGV, peaked well before the S&P 500 and helped lead the broader market lower, as did several other segments of the market.
Additionally, pressure on private equity stocks has returned, with many now trading below the lows reached in November.
In the meantime, consumer staples, as represented by XLP, are surging to all-time highs in a rather violent move. This supports the idea that the market is undergoing a re-rating of risk. That shift could be tied to expectations that multiple compression is now beginning, either because a new Fed chair may prove less market- or liquidity-friendly, or because the market is starting to distinguish between winners and losers in the AI race.
I tend to view this primarily as a re-rating of risk and the early stages of multiple compression. Microsoft’s (MSFT) P/E ratio appears to support that view.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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