In a note titled “Rotation Nation,” Mike O’Rourke at JonesTrading said most of this week has been about the rally broadening out. While tech advanced, the group is lagging behind several other S&P 500 industries. He says the deceleration of inflation since mid-2024 has opened the door for rate cuts. And now economic strength has added accelerant to the mix.
“Investors no longer need to crowd into the size and safety of the Magnificent Seven,” O’Rourke said. “Ironically, that crowding has the ‘Magnificent Seven’ collectively trading at more than twice the P/E multiple of the other 493 S&P 500 names. While the ‘Magnificent Seven’ leaders generally remain strong, the rotation has been real.”
Even as the S&P 500 jumped from one record to the next this year, indicators that gauge investor sentiment found that mood was subdued, given uncertainties about the Federal Reserve, geopolitics and the US election. This week, however, optimism has returned, though its timing is flashing a bearish signal for stocks.
Ned Davis Research’s Daily Trading Sentiment Composite returned to its optimistic zone on Tuesday, and history says every time this happened in an election year, stocks had a middling run through Election Day — on Nov. 5 this year. On the other hand, when sentiment was pessimistic as of mid-October, the benchmark index posted a 2.5% median gain over a similar period.
“The bottom line is that the recent return to optimism could weigh on the market heading into a tight election,” said Ed Clissold, chief US strategist at Ned Davis. However, if rising political uncertainty from here dampens optimism, that would set the stage for a post-election rally, he added.