Markets rarely offer a clear and complete explanation of what they do, and neither do they owe us. Even so, the messages sent by recent stocks are particularly static, conveying mixed signals about investors’ risk appetite and where the economy and markets are in their cycles. In the 17% run from the S&P 500’s mid-June low and last week’s slight pullback, leadership has come from a counterintuitive combination of (traditionally defensive) utility stocks and industrial (classically cyclical) and Apple (giant stable growth stock, somehow both loved and underrated). Eclectic Leadership in Equities The utilities sector is the only sector to set a new all-time high in the recent rally, delivering a total return of 10% in a year the S&P 500 is down the same amount. The Utilities Sector ETF SPDR (XLU) has even outperformed the S&P 500 since the market low on June 16, an unusual feat for a defensive group – one that shines late in an economic cycle – during a risk recovery rally which according to some lights looks like a new bull market. Yet industrials have also rallied, now ahead of the broader market year-to-date, with technical analysts touting the improving trend, in what would normally look like a classic early-cycle indicator. of a new market and an upward economic trend. There is some rationalization of this apparent paradox, with skyrocketing natural gas prices helping many utilities to set prices, but it’s mostly dismay. Apple, a sector of a And then there’s Apple, not so much a creature of the economic cycle as a beast of wealth creation that threatens to consume ever larger swaths of the S&P 500. The stock is losing just over 3 % this year and is about 6% off its all-time high. It is also at an all-time high against the Nasdaq 100 and has added nearly $700 billion in market value since the June 16 low. Apple, at nearly 27 times forecast earnings for the next 12 months, hasn’t been this expensive against the S&P 500 in a dozen years. The stock, with its market value of $2.75 trillion, now has a 7.4% weighting in the S&P 500, the highest of any stock in decades. This makes it larger than the energy and materials sectors combined, and almost as large as the 7.9% weighting in industrials. The S&P 500 industrial sector has 71 companies that employ more than 4 million people and will generate some $1.6 trillion in revenue this year. The sector as a whole is trading in line with the S&P 500 just over 18 times forward earnings. Apple is, of course, a single company with 154,000 employees, which is expected to post $400 billion in revenue this year. What does Apple’s remarkable momentum and lavish capitalization tell us about investor priorities and macroeconomic expectations? It’s not easy to say. That’s not enthusiasm for growth: The company forecasts revenue and earnings growth of 4% and 6% in fiscal 2023 (which begins in six weeks). Yes, there’s a perception of security and financial quality in the name, but many relatively strong stocks don’t do much. Nor is it the case – as has sometimes been the case in recent years – that a powerful phase of outperformance for Apple is occurring at a time when the wider band has been weak. In fact, the breakout of the lows recorded several fairly rare “push in magnitude” signals, such as an overwhelming percentage of stocks breaking above the 20- and 50-day average prices, which form the key basis of the unproven case. but plausible that a new bull market is underway. The equal-weighted S&P 500 still beats the market-cap-weighted benchmark this year by three percentage points, despite Apple’s strenuous efforts. No, Apple’s tenacious run simply underscores its singular status, an industry and almost a “style factor” unto itself, which equity investors regard as ballast in tough markets and the greatest sail when the winds turn favorable. . The stock is found in nearly 400 ETFs and holds a 10%+ position in dozens of technology, growth and ESG portfolios. Yet it is arguably still institutionally underowned given its high weight in the index and Berkshire Hathaway’s 5.7% stake. For all its other attributes, Apple is also a stable stock, not a reliable indicator of the rest of the market or the economy. Yet even here it is booming, up 30% in the past two months for the 11th time since 2001, according to Bespoke Investment Group. Somewhat surprisingly, after earlier two-month rallies of this magnitude, the stock continued to perform well thereafter, with a negative return only once in the following six months (in 2008), Bespoke calculates. Navigating Crosscurrents Given these characteristics, Apple’s next breakthrough move will have an outsized effect on the tape, but say little about a cycle that doesn’t conform perfectly to many historical cadences. Meanwhile, the bond market is pricing in another full percentage point of Federal Reserve interest rate hikes in the coming months, followed fairly quickly by a possible cut, going against the constant insistence (although obligatory) Fed officials that no such reversal is likely. The market seems to like this hypothetical path, embracing the notion of a so-called dovish pivot, even though historically such a move into easing has not been favorable for equities. The launch of an easing cycle usually meant that the Fed had gone too far and the economy was suffering (although the famous “soft landing” of 1994-95 was a brilliant exception). Even from the start, the compressed nature of the cycle, extreme levels of stimulus, spring-loaded supply and demand shocks due to the pandemic and reopening, and sky-high asset valuations have upended many typical market interactions and economy. Do you remember earlier this year when Wall Street informed us that stocks tended to continue rising for several months after the Fed started raising rates? The market crashed two months before the first rise, then continued to fall. And if seasoned models are in question, how do we interpret the fact that the S&P 500 has regained more than half of its total bear market losses at last week’s high? The market has never, since 1950, reached a new low after falling more than 20% and then recovering more than half of the decline at the close. It’s a positive sign, if nothing else, for sure. And so far, the withdrawal seems perfectly routine. Another plus: the evident level of skepticism among investment professionals about the reliability of the market rally. Yet, as 2022 proves, there are no unequivocal messages from the markets and no guarantees for investors.