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Stock traders curb their enthusiasm after rally

Stock figures are displayed on a screen at the Tokyo Stock Exchange on Oct. 29, 2020.   (Kiyoshi Ota/Bloomberg)
By Rita Nazareth Bloomberg

Stocks gave back some of their monthly gains on the final trading day of May amid speculation that the market has run too far, too fast as global economy risks loom.

The group of big tech names that have led the recent equity rally started rolling over this week, with Nvidia down 1% Wednesday after almost tripling in value this year.

While many on Wall Street say that doesn’t mean the enthusiasm for the sector will fade, there’s been growing concern about the fact that other industries haven’t been able to catch up in a significant way.

In fact, as the S&P 500 heads toward its third straight month gains – its longest winning streak since August 2021 – a measly 28% of its members are up in May.

That’s the weakest breadth behind a monthly advance going back to at least 1990, according to data compiled by Bloomberg.

“Much of this year’s stock market rally has been driven by only a few technology stocks, and this is not a dynamic that is typically seen at the start of bull markets,” said Robert Schein, chief investment officer, Blanke Schein Wealth Management.

“We need the participation of other sectors, and narrow market breadth is not sustainable over the long term.”

Schein expects the outsize performance of big tech to be tempered in the coming quarters.

While the combination of a debt ceiling deal and a Federal Reserve pause could propel the market higher, any strength would be short-lived as investors start pricing in lower earnings estimates, he noted.

The S&P 500 dropped below its key 4,200 level on Wednesday, joining a slide in global equity indexes.

China’s soft manufacturing data added to concerns about the outlook for global economic growth at a time when central banks are still in tightening mode.

Price data from Europe on Wednesday prompted traders to curb bets on European Central Bank rate hikes, though worries remain about the region’s prospects as demand from its largest trading partner falters.

“We’re facing quite a lot of head winds: firstly, the China growth story, clearly that’s been a major disappointment. On top of that, there’s a risk of a U.S. recession, and for the euro region, there’s a likelihood that they’re facing stagnation,” Jane Foley, head of currency strategy at Rabobank, said on Bloomberg TV.

“So you’ve got a pretty disappointing outlook for growth, not an environment where you really want to be piling en masse into high-risk assets, and therefore the dollar is likely to do well.”

Traders also watched the latest developments in Washington, with the debt limit deal struck by President Joe Biden and Speaker Kevin McCarthy heading toward a vote Wednesday in the House of Representatives.