Morning Wrap: S&P 500 and Nasdaq rally to 9-month high on AI hype, ASX 200 to bounce

Gains from megacap names like Apple, Microsoft, Nvidia and Alphabet boost US benchmarks to 9-month highs, Biden and McCarthy reach 'agreement in principle' on US debt ceiling, Ford inks a deal with Tesla to tap into its network of 12,000 supercharges, copper miners snap a six-day losing streak as spot prices bounce and a bit of food for thought for AI gains: Is it a bubble or just hype?

Let's dive in.

S&P 500 SESSION CHART

S&P 500 rallies intraday to close near 9-month highs (Source: TradingView)

MARKETS

Note: US markets will be closed tonight (Monday, 29 May) in observance of Memorial Day.

• S&P 500 rallied intraday and finished at best levels, up 0.3% last week

• Nasdaq rallied 2.5% last week vs. the Dow which was down 1.0%

• Bullish focus points for this week include AI hype, an imminent US debt ceiling deal, earnings optimism as BofA raised its 2023 S&P 500 EPS forecast

• Bearish focus points for this week include weak market breadth, S&P 500 struggling to break the key 4,200 level, hawkish Fedspeak and broad liquidity decline  

• Narrow market leadership, with the lowest number of S&P 500 stocks beating the market since 2020 and the largest 3-month spread between the S&P 500 and S&P 500 Equal-weight basket since December 1999

• Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla up 70% year-to-date while the other 493 S&P 500 stocks are up just 0.1%  

• Institutional investors are the primary source of demand for AI stocks (FT)

• Analysts warn of narrow breadth and bubble-like tech and AI share prices (CNBC)

• US money market fund assets have ballooned to a record US$5.4tn (FT)

STOCKS

• Ford shares rally on Tesla Supercharges partnership (CNBC)

• Gap shares surge despite posting net loss and declining sales (CNBC)

• American Express viewed as a “good entry point” by Morgan Stanley (CNBC)

• Musk's brain implant co Neuralink receives FDA approval for human trials (Bloomberg)

ECONOMY

• White House closing in on deal that would raise debt ceiling for two years (FT)

• McCarthy eyes Wednesday House vote on debt ceiling agreement (CNBC)

• US consumer spending increased more than expected in April (Reuters)

• No sign of credit crunch yet with bank lending up US$10bn week-ended 17-May, marking a three week high (Bloomberg)

• UK retail sales better than expected in April (Bloomberg)

• Tokyo core inflation slows, but underlying pricing pressures persist (Reuters)

• Flat Australian retail sales flags growing pressure on households (Bloomberg)

• Strategists cut China GDP growth forecasts, market indicators show chances of China policy easing at their highest in a year (Bloomberg)

Deeper Dive: AI Hype

AI-driven gains: Hype or Bubble

A few megacap tech stocks are literally holding up the entire market. Analysts are beginning to compare this to the 2000 dot-com bubble. Is the market underestimating the power of AI or is this just another fad like the metaverse?

Here's some food for thought:

• Not all tech is made equal: S&P 500 Tech Index rallied 4.5% last Thursday while the ARK Innovation ETF fell 2.7%. This reiterates that the tech gains are isolated to a handful of mega cap names

• Bubble signals: The only other time the S&P 500 Tech Index rallied over 4.0% in a single day while the rest of the market declined was at the onset and in the middle of the 2000 dot-com bubble

• Abysmal market breadth: Only 20% of S&P 500 companies are outperforming the overall index on a 3-month trailing basis, which marks the smallest percentage since the dot-com bubble burst in 2000, according to Piper Sandler

What we know for certain is that tech stocks are driving the markets. As for what will unfold, who knows. But it's important to keep an open mind.

Sectors to Watch

As we noted in last Friday's Evening Wrap, the ASX is relatively oversold and increasingly due for a short-term bounce. ASX 200 futures are up almost 1.0% but is this one of those bounces where the market rallies into something like the 20-day moving average or 7,200 level and then sells off?

Tech: No brainer. Last Friday, the iShares Semiconductor ETF (SOXX) rallied 6.5% vs. Cloud (+3.0%) and Fintech (+0.5%). Will names like Wisetech, NextDC, Technology One, Altium and Megaport continue to see positive flows?

Copper: Copper prices bounced 2.6% last Friday, which helped the Global X Copper Miners ETF snap a six-day losing streak where it tumbled 7.3%. This could see some positive flow for local names like Sandfire Resources.

ASX corporate actions occurring today:

• Trading ex-div: Hancock & Gore (HNG) – $0.005, Dalrymple Bay Infrastructure (DBI) – $0.05, Infratil (IFT) – $0.118 

• Dividends paid: US Student Housing REIT (USQ) – $0.016 

• Listing: None

Economic calendar (AEST):

No major economic announcements.