Wall Street's Honeymoon With Trump Is Beginning to Cool
Once again, investors are dealing with a two-tiered market.
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The market celebrated Trump’s announcement of the $500 billion Stargate AI program on Wednesday, but some warning signs suggest that a higher level of caution is necessary. The biggest problem with Wednesday's rally was that it was narrow and led solely by big-cap technology. Breadth was negative, and the S&P 500 Equal Weight Index RSP fell by nearly 4%.
The action felt like a blow-off top after a strong run. Reflexive buying occurred in the big-cap favorites, although the payoff from the Stargate program is far in the future and hard to quantify.
The market has enjoyed a few days of a honeymoon with Trump as he has rolled out hundreds of executive orders and moved quickly and decisively to implement his policies. Executive orders have been the easy part, further progress will be more complicated. The Democrats are already slowing down the confirmation of his cabinet picks, and there is still a tremendous amount of uncertainty about tariffs and their impact.
The positive response to Trump’s first few days in office has created overbought technical conditions, so a pullback after the euphoric jump on Wednesday would not be a big surprise. In addition, there aren’t any big fourth-quarter earnings reports until next week.
Once again, investors are dealing with a two-tiered market in which the biggest-cap technology names are the most extended while much of the rest of the market is still struggling. More than half of all stocks are still below their 200-day simple moving average, which is ignored by those who like to proclaim that this is bubble action.
The healthiest thing for this market would be a rotation out of bigger-cap technology and into the rest of the market. There needs to be more focus on picking stocks with favorable valuations rather than piling into names that are bought because they are leveraged to AI.
There have been a few bouts of rotation in the last few months, but they have not lasted long before there is another Magnificent Seven MAGS rally. One interesting development is that Apple’s AAPL valuation finally seems to matter. It has been extremely expensive for a very long time, and no one seemed to care too much, but since December 26, it has collapsed, and there is much more focus on valuation. If it happens to Apple, then it can happen to other Magnificent Seven names as well.
Semiconductor stocks are under pressure early on Thursday, as some of the Stargate euphoria reverses.
At the time of publication, Rev Shark had no positions in any securities mentioned.
