The second quarter reports claim the S&P 500 continued its all-time high move with a solid 4% gain. So, what’s wrong with that description? Three issues: imbalance, risk shift, and inflation.
Imbalance
The six trillion-dollar companies carried the entire S&P 500 Index in the second quarter with a heady 16.8% performance. The other 494 companies? They produced a decline of (0.8)%. That level of divergence can be a symptom of excess enthusiasm.
Risk shift
With the biggest companies producing the biggest gains, they naturally ended the quarter with a larger share of the S&P 500. Their proportion of the index rose 3.4% from a sizable 27.6% to 31%. Take note: That is six companies accounting for almost one-third of the S&P 500. It used to be said that if a group of stocks reached a 20% allocation, watch out. It was the sign of a bubble. That 31% is breathtaking but is apparently being accepted because AI is thought to offer limitless possibilities.
Inflation
There is a critical need to adjust prices for inflation. Just like GDP growth is viewed in “real” (inflation-adjusted) terms, so should every other currency-based measure. But that takes work because few organizations provide inflation-adjusted numbers.
Below are the nominal and real stock market indexes. Note how much of the so-called all-time high moves are erased or muted when adjusted for inflation.
The bottom line – The second quarter brought “hidden” concerns
Good numbers beget happiness, enthusiasm, and apparent proof of more good times ahead. That is okay if nothing is amiss. Unfortunately, the second quarter had issues: imbalance, risk shift and inflation. Therefore, expect realization to rise and adjustments to be made.
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