Why It Could Be a Cruel Summer for Stocks

The stock market has been hitting new highs, but most stocks are struggling. Even news that would usually move them isn’t doing the trick, a sign that equities won’t be an exciting place to invest in a while.

The S&P 500 index fell 0.1% for the week, while the Dow Jones Industrial Average dipped 0.1% and the Nasdaq Composite advanced 0.2%. Yet the Invesco S&P 500 Equal Weight exchange-traded fund dropped 0.7%. That ETF, unlike the market-value-weighted index, holds the same amount of each stock, so its move reflects that the true performance of the average stock was poor.

The equal-weighted ETF has been trying—and failing—to crack its record high of $169. Even a positive read on the global economy from FedEx couldn’t compel buyers to push the fund up to new highs. On Wednesday, FedEx said revenue will grow in the low- to mid-single-digit percentages for fiscal year 2025, a clear signal that global demand for goods is growing. Yet the equal-weighted S&P 500 dropped 0.4% that day.

“It’s a poor little market that can’t find its way,” writes Frank Gretz, market technician at Wellington Shields. “Healthy markets are about participation, and this market is lacking there.”

Nor did the market respond to a benign inflation report on Friday. The personal consumption expenditures index rose 2.6% year over year in May, down from April’s 2.7% reading. That sent the two-year Treasury yield—a barometer for expectations about the federal-funds rate—down to as low as 4.67% from 4.74% the previous week. That would seem to boost the case for rate cuts. Yet the S&P 500 gained just 0.1% Friday, as the market turns from focusing on interest rates to worrying about economic growth.

“Investors have suddenly shifted their mind-set to looking at the economic data and not just saying this is great that the Fed is going to cut rates, but maybe that we’re going to head into recession,” says Seema Shah, senior global investment strategist at Principal Global Investors.

That could conceivably keep investors in Big Tech, particularly the Magnificent Seven. Those stocks had a good week, with five of the seven rising. Nvidia, down 2.4%, and Microsoft, down 0.6%, were the exceptions. These companies do well in good times, but their stocks can outperform when the economy slows, too, because their growth doesn’t rest on the economy as much as it does on bigger themes such as artificial intelligence. Plus, lower rates make future profits more valuable.

But even there, concerns abound. The most glaring is valuation. The S&P 500 Information Technology Sector trades at 33.5 times 12-month forward earnings after gaining 43% from its October low, likely already reflecting rising earnings and falling rates.

Add it all up, and investors could be set up for a cruel summer.

Write to Jacob Sonenshine at [email protected]