Market Leadership Breaks as Valuation Pressure Intensifies
Here is what Members of Navigating The Member Received Today:
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN MSFT
Stocks fell sharply, even though the S&P 500 finished the day down just 85 basis points. Technology and software stocks were hit the hardest, pushing the NASDAQ 100 down more than 1.5% and dragging the XLK ETF lower by over 2%. The damage in the software sector has been undeniable, with some stocks now trading below their 2022 lows. Adobe, for example, closed at its lowest level since October 2019.
In some respects, this is similar to the transition from 2021 to 2022. The key difference is that the Federal Reserve is now cutting rates, whereas it was raising them at that time. Oil was also surging toward $100 at the time, whereas today it is struggling to hold above $60. Still, it is easy to see that the Software ETF, IGV, peaked well before the S&P 500 and helped lead the broader market lower, as did several other segments of the market.
Additionally, pressure on private equity stocks has returned, with many now trading below the lows reached in November.
In the meantime, consumer staples, as represented by XLP, are surging to all-time highs in a rather violent move. This supports the idea that the market is undergoing a re-rating of risk. That shift could be tied to expectations that multiple compression is now beginning, either because a new Fed chair may prove less market- or liquidity-friendly, or because the market is starting to distinguish between winners and losers in the AI race.
I tend to view this primarily as a re-rating of risk and the early stages of multiple compression. Microsoft’s P/E ratio appears to support that view.
-Mike
Glossary by ChatGPT
Basis Points – A unit of measurement equal to one-hundredth of a percentage point, commonly used to describe changes in interest rates or yields.
Consumer Staples Sector – A defensive equity sector consisting of companies that produce essential goods with relatively stable demand.
ETF (Exchange-Traded Fund) – An investment fund that trades on an exchange and typically tracks an index, sector, or asset class.
Federal Reserve – The central banking system of the United States responsible for monetary policy and financial stability.
Multiple Compression – A decline in a stock’s valuation multiple, such as P/E, often due to changing risk perceptions or macroeconomic conditions.
NASDAQ 100 – A stock market index consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange.
P/E Ratio (Price-to-Earnings Ratio) – A valuation metric comparing a company’s stock price to its earnings per share.
Re-Rating of Risk – A market process in which investors reassess and adjust the level of risk they are willing to price into assets.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.