The second quarter isn’t over yet, but the end is near. That means the stock market is apt to be influenced by rebalancing dynamics, and it appeared yesterday as if the stock market encountered such activity.
The mega-cap stocks, which have been stalwarts during the second quarter (and all year for that matter) ran into a rush of selling interest. That sent the Vanguard Mega-Cap Growth ETF (MGK) 1.3% lower, which weighed heavily on the market-cap weighted S&P 500 (-0.5%).
An interesting undercurrent is that the Invesco S&P 500 Equal-Weight ETF (RSP), the Russell 2000, and the S&P Midcap 400 Index, which have not been stalwarts in the second quarter (or all year for that matter) outperformed and ended the session with modest gains.
Similarly, Treasuries eked out some small gains.
There is still a long way to go in this trading day, but the early look favors a mixed start for stocks.
Currently, the S&P 500 futures are up six points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 53 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are down 27 points and are trading 0.1% below fair value.
This imbalance reflects some tipping of the scales, with mega-cap stocks back in a position of relative strength. Alphabet (GOOGL) is an exception as it grapples with a Bernstein downgrade to Market Perform from Outperform on the heels of a UBS downgrade yesterday to Neutral from Buy.
The question now is, will this relative strength hold for the duration of today’s session or will these stocks ultimately face another rebalancing roll?
Dow component Walgreens Boots Alliance (WBA) is already rolling over, not because of rebalancing activity though, but because of disappointing fiscal Q3 earnings results and full-year guidance that the company blamed in part on “shifting U.S. consumer spending with heightened macro pressures.” Shares of WBA are down 8.6%.
Notably, Delta Air Lines (DAL) sounded a much different tune, having raised its Q2 EPS outlook above consensus estimates, saying this summer travel season is stronger than expected and that Q2 will be the highest Q2 earnings in its history.
That weakness in Walgreens is weighing on the Dow Jones Industrial Average futures, but with a market capitalization of just $27 billion, it isn’t moving the needle for the S&P 500 futures.
A stronger than expected Durable Goods Orders Report for May helped move things some. Total durable goods orders were up 1.7% month-over-month (Briefing.com consensus -1.0%) following an upwardly revised 1.2% increase (from 1.1%) in April. Excluding transportation, durable goods orders increased 0.6% month-over-month (Briefing.com consensus 0.0%) following a downwardly revised 0.6% decline (from -0.2%) in April.
The key takeaway from the report is that nondefense capital goods orders, excluding aircraft — a proxy for business spending — jumped 0.7% following a 0.6% increase in April.
The June Consumer Confidence and May New Home Sales reports will be released at 10:00 a.m. ET.
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Originally Posted June 27, 2023 – Some tipping in rebalancing scales
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