Market Recap:
The market ended August on a calmer note. The S&P 500 touched new all-time highs, yet those gains were driven by a shrinking group of very large technology companies. In other words, fewer stocks are responsible for pushing the market higher which can be a sign of fragility beneath the surface.
Inflation data (CPI) came in mixed yet the employment data is demonstrating signs of slowing, keeping the Fed’s next move in focus. Meanwhile, metal and mining stocks moved higher supported by stronger commodity prices.
What We’re Watching:
We’re watching closely for signs of accelerating inflation. The outcome of a possible rate cut depends entirely on the economy. If the Fed cuts rates and the U.S. enters a recession shortly after, we could begin to face a stagflationary environment where inflation accelerates while economic growth slows. This is historically one of the most difficult environments for passive portfolios.
Volatility also drifted to year-to-date lows, yet September has historically been the weakest month for stocks. The market’s complacency may not last.
Chart of the Week:
The two largest companies in the S&P 500, NVIDIA and Microsoft, now account for over 15% of the index, the highest level of concentration ever recorded. While these companies have delivered impressive gains, the growing dominance of just two stocks raises important questions about risk exposure for passive investors. Investing in an S&P 500 index fund no longer offers the broad diversification it once did. Instead, it provides concentrated exposure to a handful of stocks.
We believe market leadership is cyclical. When concentration reaches this level, it’s critical to remain flexible and prepared to adapt as conditions change.
