So much has happened this year, but the market suggests not much has changed. War warnings, policy shifts, the hunt for AI victims, at least one private company worth an estimated $1 trillion looming on the public market, and much more. But overall, the portfolio and economic context remain largely unchanged. The S&P 500 index is loaded with top-quality stocks, which explains its extreme stagnation. The index exceeded the 6,900 level in more than 40% of all trading sessions over the past two months. The first time this level was touched was on October 28th. By this time in February, the index was trading in its narrowest range in 60 years, according to Bespoke Investment Group. The Bollinger Bands, which define the index’s general trend, are closer together than they have been in the past five years, showing how tightly wound the market is. .SPX 6M Mountain S&P 500, 6 Months The economy continues to be in a familiar setting. Last year’s economy grew at a nominal rate of about 5%, driven slightly more by inflation than by real output growth, which is a fairly accurate representation of the economy in 2024. Capital investment by companies seeking “superintelligence” is once again having a direct impact on economic activity. Consumer spending remains supported by high-income asset owners and an aging population operating in a service-oriented economy. Don Rissmiller, chief economist at Strategas Research, frames the layered market dependencies this way: “This chain is likely to be a recurring theme in 2026. The U.S. economy depends on the stock market, the stock market depends on the bond market, and the bond market depends on the commodity market (which drives up inflation) and productivity (inflation and unit labor costs). Corporate earnings are on track for five straight quarters of double-digit growth, a positive but unchanged pace that investors clearly expected well before the report. It was certainly dramatic that the Supreme Court struck down the basis for most of President Trump’s tariffs. However, changes in fees through alternative means are likely to only affect the edges, not the core. Moreover, a market that rose 40% in less than seven months after the initial tariff shock last April is not currently one that could gain much new energy from gradual easing of the impact of tariffs. What else remains the same? Federal Reserve Policy. The market now expects the Fed to keep policy unchanged through the first half of 2026. On the surface, this may be a positive thing, given that it suggests an economic equilibrium that does not require immediate corrective action. However, as the job market remains stable and the measured inflation rate remains above 2.5%, the Fed’s stance is clearly one of “wait and see.” Inside As we have detailed here over the past few weeks, the S&P 500’s surface-level stability is an interesting result of the opposing currents moving rapidly beneath it. The equally weighted S&P 500 is up 6.4% this year, while the group Magnificent 7 is down 5%. While industrial and commodity sectors are running around shouting about a “global manufacturing revival,” they are also inflating their own valuations by pre-empting such a turnaround to a large degree. MAGS YTD Mountain Roundhill Magnificent Seven ETF (MAGS), YTD I have argued that the overall tape has been rather fortunate to have expanded this way and so far been able to absorb a rare degree of internal volatility without suffering a more severe index-level decline. “Diversification trading” (literally, trading in which professional investors actively bet on large divergences between index members) has cushioned the market as major mega-cap stocks have slumped. Financial stocks and consumer discretionary groups are a little behind the curve and will need close monitoring until they break out completely. The appalling actions of private asset managers, which have put a small number of credit funds under stress, are so far being dismissed as an isolated problem area without much impact on the core banking sector. But, unsurprisingly, this maintains the overall upward trend, with about 60% of all stocks outperforming the S&P 500. This creates a healthy range reading, which pleases professional stock pickers, but has not historically been associated with significant increases in the index. The S&P’s 50-day moving average is currently almost flat, giving the impression of a “wait and see” approach. What’s interesting is that diversification is paying dividends for investors who wait for the S&P 500 to take its path from here. Non-US stocks are off to the best start compared to the S&P 500 in memory. The 60/40 stock/bond strategy has outperformed the S&P 500 on a total return basis this year, returning 14.5% annually over the past three years, well above the long-term average of around 8%. AOR YTD Mountain iShares Core 60/40 Balanced Allocation ETF (AOR), Year to Date One of the benefits of an indecisive, range-bound market is that it takes away conviction from both bulls and bears, prompting them to reconsider their assumptions. Bulls may ask whether the market’s failure to make significant progress during the best season, when record investor inflows into equities are expected, signals a worsening problem. Leadership in the AI industry is concentrated in Alphabet, along with memory stocks and energy/electrification infrastructure suppliers, who are leveraging product scarcity to impose quasi-taxes on builders. Nvidia earnings look forward But for those who have been bearish in the past, is it comforting to see that a 40% selloff over seven months is only down 5% for the S&P 500, and that the index remains within 3% of this year’s high, even though the Mag7 stocks are an average of 15% off their all-time high? AI Is there a way for the risk to dissipate from this lateral movement as the focus is on disruption and private credit soft spots move from “what ifs” to quantified haircuts?Despite the way it’s being treated, NVIDIA prides itself on being the last tech giant to report quarterly results, but the stock isn’t necessarily a bellwether of the overall direction of the market. Still, it would be foolish to deny that the reaction to Nvidia’s admittedly impressive performance could be an excuse for this market to clear its throat and speak its intentions, with the deal expansion moving along rather quickly after months of valuation compression.
