Strong Indices, Uneven Strength Beneath the Surface

A strong August, but the market is not moving in lockstep

The first trading days of August have been strong for equities. The S&P 500 has risen 2.9% since the start of the month and the Nasdaq 3.8%. At the same time, long-term yields have fallen and volatility has remained low.

Beneath the surface, however, the picture is more nuanced. Performance among large technology companies has diverged, the market-cap-weighted S&P 500 has outpaced its equal-weight counterpart, and gold has risen without a clear stress reaction in equities.

Our key takeaway this week is that the market's overall direction remains strong, but the gains are not evenly distributed.

Key points

1. The equity-market trend is strong, but the rally has become more selective. The S&P 500 and Nasdaq have started August strongly, but clear differences are visible both within mega-cap technology and across the broader index.
2. Gold's rise stands out in this week's market picture. Gold has strengthened while the VIX has remained low and equity indices have risen.
3. Oil's rebound is testing the recent relief in yields. Brent is still clearly lower in August, but Thursday's nearly four percent rise coincided with an increase in long-term yields.

The rally continues, but the market is choosing its winners more carefully

Based on the major equity indices, the start of August looks strong. The S&P 500 has risen 2.9% over the first trading days of the month and the Nasdaq Composite 3.8%. Despite a small decline on Thursday, the S&P 500 finished only slightly below its previous record close.

Beneath the indices, however, there is considerably more dispersion. Nvidia is up about 9.1% in August, Microsoft 7.6% and Meta 6.0%. Amazon and Alphabet, by contrast, have traded almost sideways since the start of the month. Both saw strong earnings reactions at the end of July, and August has so far added little further upside.

Based on earnings season, we see no signs that investors are broadly abandoning the technology sector. Instead, company-specific differences have widened. Even a good result is not automatically enough to lift the share price: Datadog fell about 19% on Thursday following its earnings release.

Dispersion within the technology sector has therefore increased markedly. That still does not tell us how broadly the S&P 500 rally is spreading. To assess that, it is useful to look at the equal-weight version alongside the market-cap-weighted index.

SPY's stronger performance indicates that the largest companies have driven the S&P 500's gains more than the rest of the index. At the same time, the equal-weight RSP has also risen clearly, so the strength has not been limited to just a handful of mega-caps.

The rally is therefore not especially narrow, but neither is it completely evenly distributed.

This makes the equity-market picture two-sided. Differences between companies have widened, and the largest companies have driven the index more strongly than the rest of the market. At the same time, the rise in the equal-weight index shows that strength has not been limited to just a handful of mega-caps.

The next key question, then, is not simply whether the S&P 500 reaches a new record. More important is whether the rally broadens or becomes increasingly dependent on a smaller group of stocks.

Gold rises without broad equity-market panic

Outside equities, the week's most interesting move is in gold.

Gold has risen 5.2% since the start of August. Silver has strengthened 6.7% and copper 3.9% over the same period.

More interesting than gold's rise itself is the environment in which it has occurred. The S&P 500 and Nasdaq have risen at the same time, while the VIX, which measures expected volatility in the S&P 500 options market, stood at just 15.15 on Thursday. In other words, there are currently no signs of a classic, broad-based equity-market panic.

Gold is rising, but the equity market's fear gauge is not

This does not mean that gold cannot be benefiting from any safe-haven demand at all. It means that gold's rise cannot reasonably be explained solely by investors avoiding risk.

One plausible source of support comes from the bond market. The U.S. 10-year Treasury yield has fallen by about 6 basis points since the start of August, while the two-year yield is down about 3 basis points. Because gold does not pay interest, its relative attractiveness generally improves when yields fall.

The most interesting test for gold is still ahead: will it remain strong if the decline in yields comes to a halt?

If it does, the move is likely being driven by factors broader than the interest-rate environment.

Oil is a reminder that interest-rate risk has not disappeared

Brent is still well below its late-July level in August, but it rose nearly four percent on Thursday. U.S. Treasury yields also rose on the same day.

Oil's late-week rebound brought a new test

One day is not enough to conclude that a new oil rally has begun. The move is still interesting, because rising energy prices could once again push up market inflation expectations.

We therefore monitor oil prices primarily through the bond market: if Brent continues to rise, will long-term yields and inflation expectations strengthen as well?

Bitcoin has risen, but lagged the Nasdaq and metals

Bitcoin has risen about 2.2% since the start of August. The gain has been more modest than in the Nasdaq and gold, but the direction has been the same.

It is too early to draw far-reaching conclusions from the difference based on only a few trading days. So far, Bitcoin has participated in August's market rally, but it has not been among its strongest drivers.

Labor market data: does it change the rate outlook?

The U.S. economy lost 23,000 jobs in July, and figures for the previous two months were revised down by a combined 103,000 jobs. The unemployment rate fell to 4.1% and hourly earnings were 3.2% higher than a year earlier.

The market reaction pushed yields lower and supported equities. S&P 500 futures rose 0.5% and Dow futures 0.33%, while the U.S. 10-year yield fell from 4.67% to 4.60%.

Our interpretation: weak labor market data reduced upward pressure on yields. In the short term, this supports equities, but continued deterioration in the labor market could raise concerns about economic growth.

This week's interpretation: A strong index does not tell the whole story

The start of August still looks strong at the index level. At the same time, differences within the market have widened: technology stocks are diverging, gold is strengthening without clear equity-market stress, and Bitcoin's gains have been more modest than those of the Nasdaq and metals.

We do not yet interpret this as a sign of broad-based risk aversion.

In our view, a better description is that the market has become more selective.

That is why the most interesting question now is not simply whether the S&P 500 reaches a new record. More important is how broadly the rally begins to spread within the index.

What are we watching next?

1. Market breadth

Will the equity-market rally broaden beyond mega-cap technology? The performance of the equal-weight and market-cap-weighted S&P 500 provides a useful measure.

2. Gold's resilience

Will gold remain strong if the decline in long-term yields stops?

3. Oil and yields

Will the late-week rise in oil prove to be a short-lived counter-move, or will it begin to show up again in inflation expectations and Treasury yields?

“The August numbers look strong. What is more interesting is that the market is no longer moving in lockstep. That is precisely why we are watching breadth, gold and oil, not just the index.”