Unplugged

By Matthew Gutierrez and Shawn O'Malley · June 5, 2024

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📈 While inflation persists, interest rates remain elevated, geopolitical tensions simmer globally, and housing costs soar, most major market segments continue to thrive: The S&P 500 just clocked another record high Wednesday.

As stocks, gold, real estate, and Bitcoin have continued to rise, it’s further proof that the stock market is not the economy. It’s also another reminder that the S&P 500 has risen for decades despite all kinds of reasons to worry or sell.

In a nutshell, that’s why the best investors separate market performance and stock valuation from transitory economic conditions to withstand short-term volatility and benefit from the market's upward trajectory.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Big tech companies unplug the stock market from reality
• In honor of Charlie Munger

This, and more, in just 5 minutes to read.

POP QUIZ

June and July have historically been very positive months for U.S. equities. What is the best two-week period of the year since 1928? (Scroll to the bottom to find out!)

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In The News

💸 Big Tech Stocks Unplug the Stock Market From Reality

There’s Big Tech, and then there’s everything else. The dominance of Big Tech stocks like Apple, Microsoft, Nvidia, and Alphabet in the S&P 500 could be masking how fearful investors truly are about the Federal Reserve keeping interest rates higher for longer.  

The average stock has been heavily impacted — both positively and negatively — by movements in bond yields more than at any point this century, according to a Wall Street Journal analysis. But the index overall remains relatively insulated due to the huge cash reserves of the Big Tech giants, among other factors. 

Cash hoarding: The divergence is rooted in corporate profits and interest rate exposure. 

• The mega-cap tech companies have massive cash hoards, allowing them to earn high returns while also locking in low interest rates by refinancing debt before the Fed's rate hikes began in March 2022. Of course, smaller companies lack such cash buffers and easier access to bond markets, making them more vulnerable to higher rates.
• The valuation split is also stark, and the correlation between individual stock performance and bond yields is at record levels compared to the S&P 500.
• A combination of higher debt loads, floating-rate exposure, lower cash reserves, consumer spending sensitivity, and refinancing challenges make smaller enterprises more vulnerable to the impacts of higher rates.
• The trend reflects economic disconnects, where poorer and younger borrowers feel acute pressure from higher rates, dragging on growth. But Big Tech's sales are largely insulated unless the slowdown worsens. 

Flipside: Ironically, this is the opposite of 2022, when Big Tech plunged on valuation concerns, underperforming the average stock. Now, the AI frenzy is offsetting valuation worries for the mega-caps, while the smaller rate shock versus 2022 and recognition of their debt profiles further buoy the largest names. 

Why it matters:

For starters, the S&P 500 closed at another fresh record Wednesday, and shares in big tech stocks (notably Nvidia) continue to climb.

Yet investors outside Big Tech have reason to...