Is the market connected to economic reality? Jim Tierney, AB CIO of Concentrated U.S. Growth, breaks down the current market melt-up and details how key tech stocks are impacting the market.
JULIE HYMAN: I want to broaden this out a little bit but talk more about this issue of narrow leadership. The market-- the melt-up as it's being called has taking a slight breather this morning. That's thanks in part to Apple. This is the subject of the morning brief today, which apparently I'm saying in my cartoon here.
The FOMO crowd may come out of the woodwork to chase the rally. There are an abundance of opinions on how long it will last. And you know, as I said, we should be watching which stocks are participating here because the bulk of gains this year have been thanks to a handful of large cap tech stocks.
Jim Tierney is still with us, AB CIO of Concentrated US Growth. You know, in the melt-up, you know, I've been doing this a long time and I've heard the words melt-up before. But like it's one of those things that people throw around. I guess it just means stocks keep going up. They're climbing the wall of worry.
They're doing whatever they do. And then eventually some of the bears throw in the towel and start buying as well. But I was looking at the S&P versus the S&P equal weight, right, as sort of a proxy for this and the ratio of the two. And as you say, this year it has been the S&P 500 vastly outperforming the equal weight index. But why is that still a problem?
JIM TIERNEY: When you're counting on just a few stocks to drive performance, that, historically, has not ended well. You look at the most concentrated markets, this year so far, year to date, tops it at more than 100% of the performances coming from just a handful of companies. But in the past where we've seen that, in the 70s and the 80s percentile driving the market performance, it was 2007, it was 1999, it was 2020 and 2021. We all know how each of those ended. So the market has to broaden out, or at some point, these 8 or 10 stocks just lose-- run out of gas.
BRAD SMITH: Does a melt-up mean detachment from fundamentals?
JIM TIERNEY: I think we've had a little bit of a detachment this year. As I mentioned, the earnings have not kept pace. It's mainly been PE multiple expansion. As I look forward, we need a heck of a lot more earnings growth in '24 and '25, and we need more companies sort of driving those gains.
JULIE HYMAN: And we saw a little taste of that last week actually. On Thursday and Friday we saw a little bit of a broadening in that sort of last push-up towards the 20% rally from the lows. But then we sort of failed to get there. Are you seeing any encouraging signs that we're going to get a continuation of the rally accompanied by that broadening?
JIM TIERNEY: I think at some point the market has to connect to the economic reality, and it's uncertain what the economy is going to look like in the second half. Sure feels like there are a lot of pressures. We see all kinds of data points day after day, whether it's Fastenal reporting sales this morning that were a little bit disappointing, whether it was Costco a little bit disappointing last week.
And remember, we have student loan debt repayment starting again September 1, and that's another headwind to the consumer. So I think, as we look forward, the economy is going to be a little bit tougher. So what you're looking for are companies that can sort of plow through that, that can drive earnings growth in the second half of this year and into 2024.
BRAD SMITH: Does that mean retail can't- because we had seen some of the calls specifically to which you were mentioning around student loans, how that might impact a company like Target. Does that mean that retail is not necessarily part of even the melt-up environment that we've been tracking, or is there still an opportunity for retail to experience, perhaps, the overflow?
JIM TIERNEY: I think the retail space has been tough because people have stopped buying goods and they've gone more to services. I don't see what switches that back. And you look at where our purchase is versus pre-COVID levels, we're still pretty elevated. So I think there's more unwind that has to happen there. So I think retail is going to be under pressure. Obviously, there's a good company here or a good company there. Walmart, as an example, is taking a ton of share as consumers are trading down and buying the basics sort of at the expense of Target, as you mentioned.
JULIE HYMAN: When you hear the likes of Morgan Stanley say profits this year are going to fall by 16%, does that sound right to you? Is it going to be that kind of magnitude?
JIM TIERNEY: Boy, you look at all the margin pressure and you say, that's possible. But first quarter earnings were really good and we didn't have the negative downward revisions. Instead, we kind of had the first quarter gains and then the number of stayed flattish. So we'd have to see a big downturn.
Corporate America is incredibly resilient in terms of managing costs, managing margins. And I think what the tech companies did and part of the reason we got such a good bid for the tech companies is they cut costs aggressively. And if we see more of that spread throughout corporate America and those earnings hang in, I think that could be a nice surprise in the second half of this year.
BRAD SMITH: All right. Stay with us, Jim. We've got much more to discuss here this morning.