New month brings uneven performance
(These are the market notes on today’s action by Mike Santoli, CNBC’s Senior Markets Commentator. See today’s video update from Mike above.) New month, familiar market action. Uneven performance across sectors with a couple of mega-cap AI proxies supporting the S & P 500 while overall breadth struggles and old-economy cyclicals struggle a bit. The character of Monday’s session, and the past week, has done little to quiet the voices declaring that subpar market breadth, severe index concentration and myopic enthusiasm toward the AI infrastructure theme are making the market unbalanced and vulnerable. Yet the broad uptrend has held, year-end tendencies favor a further advance and earnings in aggregate are coming through just fine. The generic setup is well understood: Good years tend to finish strong, November has an 80% win rate, active professional investors have lagged in performance and in exposure to the strongest parts of the market, and therefore should be expected to buy dips and chase strength. It’s all plausible and rooted in historical experience, though of course not guaranteed. It’s hard to look past the apprehension around the consumer’s stamina, evident in the sectors with links to discretionary spending. The equal-weighted consumer-discretionary ETF is 8% off its high and up only 7% this year. Restaurant stocks within the S & P 1500 are 14% off their high and off another 1.2% Monday. Softer labor markets, government shutdown, squeeze on lower-income budgets all part of the story. The rally in recent months has had a distinct capital-over-labor, corporate-over-consumption, capex-over-household-spending tone. This flatters the S & P 500 given its industry exposures divergences are accumulating under the surface. The performance of consumer discretionary over staples is a key indicator of the market’s macroeconomic message and has held in OK thus far. But this owes quite a bit to the outright ugliness of staples performance rather than strength in the cyclicals. As noted, earnings are generally overachieving relative to forecasts. But the extreme punishment handed out to companies missing on both revenue and earnings has been extreme, a reflection of investors’ sensitivity to any hints of fundamental deterioration. Alphabet ‘s combined $25 billion debt sales Monday, between Europe and the U.S., follows Meta ‘s similar-sized bond offering last week, pushing Big Tech further into the debt-financed stage of the AI buildout. The companies themselves can easily shoulder this paper, and in fact arguably have been underleveraged for years. But it works against the idea that the companies are simply deploying ready cash into the data center expansion. And it threatens to jostle aside other borrowers or slightly raise their costs. Apart from the debt financing, Meta shares have failed so far to bounce emphatically after its earnings report and increased capex guidance last week, leaving the stock some 19% below its recent high. It’s on some level a positive sign that investors are discerning among the Mag7 names based on strategic direction, though it’s unclear the market can handle too many such expressions of impatience among the Nasdaq heavyweights.
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