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S&P 500 Breaks Through 5,000: Is It a Milestone or a Trap?

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S&P 500 - S&P 500 Breaks Through 5,000: Is It a Milestone or a Trap?

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The recent surpassing of the 5,000 mark by the S&P 500 could not have happened had it not been for one sector and one sector alone. Technology has undeniably been the main driver.

I now wonder if we could see a very short-term shift away from large-cap tech stocks into relatively beaten-down small-cap stocks. It seems likely that we could get some surprise strength in small-cap stocks in the very short term, and at least as of right now, that seems to be starting.

Is a New S&P 500 High a Trap?

However, the sustainability of this trend raises questions, particularly because small-cap stocks often lean heavily toward cyclicals and value stocks. These segments, once again, have lagged the broader market. If the bull market is real, and if AI is real, strength must broaden out. This would kill the remaining bears and set up for a risk-off surprise in all stocks in March just as everyone starts noticing small-caps waking up.

Traditionally, small-cap stocks are considered more volatile, but they offer higher growth potential compared to their large-cap counterparts. Should outperformance kick in here, especially in a market overshadowed by tech giants, it would mark an important shift in investor sentiment, favoring more diversified and risk-oriented portfolios. Perhaps the psychological level of 5,000 on the S&P is the catalyst.

Against this potential new momentum comes the gradual increase in Treasury yields, reflecting investors’ acceptance of fewer rate cuts in 2024. This signals a cautious optimism about the economic outlook.

However, this optimism is tempered by high-level economic indicators suggesting a slower pace of easing and weakening consumer strength, which may herald the end of the current economic expansion. The normalization of rates on the long end of the yield curve might continue, but the looming possibility of a flight to safety, triggered by a significant credit event, remains something I still very much believe is in our future.

The focus on inflation and retail sales data in the coming week is crucial, as these indicators will significantly influence interest rates. A persistent disinflationary trend could bolster bonds, providing a reprieve amidst market uncertainties. However, the limited impact of retail sales on the market thus far highlights the challenges in gauging consumer behavior and its implications for economic health. The behavior in small-cap stocks on these data points will be an important “tell” on market perception here.

The Bottom Line

The S&P 500’s milestone of surpassing the 5,000 mark is a testament to the strength of technology momentum.

I think we see small-cap stocks run here for a short-term trade, but investors cannot overlook the challenges in cyclical and value stocks. Inflation and retail sales will further illuminate the path ahead, offering insights into the interplay between consumer behavior, economic health, and interest rates. And if I’m right about the sequence, then the S&P 500 crosses below 5,000 and a correction hits in March just as everyone is getting comfortable with small-cap momentum.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing. Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers. InvestorPlace readers that are new subscribers to the The Lead-Lag Report can receive a 30% discount.


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