S&P 500 Nears All-Time High Amid Divergence

The S&P 500 is about to hit all-time highs, even as the vast majority of individual stocks are not at all-time highs, a significant divergence.

The S&P 500 equal-weight index has experienced seven consecutive weekly declines, a trend that marks the worst market breadth erosion observed since 2022. Extreme levels of fear define the current market sentiment, as shown by stock price breadth and strength.

The speaker notes that these historical periods ultimately marked market bottoms. Despite the negative signal from the equal-weight index, the NASDAQ 100 has been performing strongly, rising about 80 basis points and reaching 762.

The 10-year Treasury yield recently reached 5.34%, its highest level since 2002, driven by a confluence of economic shocks.

The market faces an oil shock, a rate/yield shock impacting mortgages, credit cards, and car loans, and an economic/corporate yield shock.

The corporate yield shock is tied to companies borrowing to fund the artificial intelligence infrastructure buildout, a critical factor needing to continue for market support.

Because these signals historically precede market bottoms, the current negative market breadth is viewed as bullish by the speaker.

The market has already priced in these conditions, a forecast made by the channel three weeks ago.

These fears included $109/barrel oil prices, nearly five rate hikes, and prolonged conflicts in Iran and Ukraine, which collectively masked underlying economic resilience.

A New York State Controller's report shows Wall Street firm revenue increased by 51.3% compared to last year, with underwriting fees for AI-related debt and IPOs up 68% in the first half of the year.

The world's 100 largest tech billionaires collectively added $845 billion to their wealth through September this year, with Elon Musk accounting for approximately 30-40% of this total increase.

The projected Federal Reserve funds rate now expects 4.3 total hikes by next September, a reduction from the previous 4.8 due to recent jobs data.

Oil prices have moderated, trading at $98 on Brent, and 10-year Treasury yields are nearing their peak, according to the speaker.

As negative shocks like high oil prices and rate hikes subside, the underlying economic strength is expected to remain, potentially leading to a euphoric market rally.

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RSP, the equal-weight S&P 500, is viewed as a potential signal of a market bottom, similar to 2002 and 2022, even as smaller firms face significant challenges.

Russell 2000 small caps are down 8.5% from their August 14th peak, with over one-third of these companies unable to cover interest payments from operating profits. Utility stocks dropped 13% in 30 days as high Treasury yields make their dividends less attractive than risk-free 5.29% rates, and the KBW bank index is down over 12% since mid-August due to potential deposit flight concerns.

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The S&P 500 and Russell 2000 are undergoing internal structural changes, even as labor market data remains strong with weekly numbers beating expectations at over 22,000 and 23,000.

Significant gains are observed in AI-related stocks such as Broadcom, Nvidia, and the cybersecurity firm Crowdstrike.

Jamie Dimon notes a tenfold increase in cybersecurity concerns due to technological shifts like Claude, highlighting the critical role of AI in current market dynamics.

Microsoft and AMD are highlighted as key performers with continued upward potential, contributing to the market's momentum.

Market breadth is expected to expand if fear levels on the Equal Weight S&P 500 (RSP) decrease, with current all-time highs potentially signifying a broader bottoming process akin to 2002 or 2022.

Underwriters for the economic boom, such as Anthropic and OpenAI, represent potential red flags, while a sustainable reduction in oil prices remains a critical factor for market stability.

Software companies like Oracle and Palantir are projected to benefit from lower yields. A weak payroll report could conclude Federal Reserve rate hikes and drive markets higher by unwinding expectations of further cuts.

The 2000-2002 period witnessed a significant 47% drop in the S&P 500 from March 2000 to October 4th, 2002.

The market then flattened between October 2002 and March 2003 before the Federal Reserve's intervention. In 2022, the S&P 500 dropped 18.7% during the Fed's hiking cycle, finding a bottom in October.

The speaker compares current market movements to previous bottoms in 2002 and 2022, both of which bottomed out in October.

It is suggested that the equal-weight (RSP) index might have reached its bottom as of last Friday, October 2nd, raising questions about whether the recent weakness was limited to specific sectors or represented a broader bear market trend for everything but the richest tech stocks.

This shift in perspective is underscored by Nebius's performance, which rose from the 216 line to 252, targeting 339, though slight concern remains regarding Coreweave's debt levels.

Ultimately, the severe downward pressure on these stocks is seen as having passed, despite some lingering debt concerns.

Peak yields, peak oil, and peak Fed rate hike expectations are key indicators that provide significant upside potential for the broader economy.

These factors are paired with the confirmed bottom in hardware data centers, reinforcing the positive outlook.

The speaker dismisses tail risks like geopolitical instability as improbable, maintaining a strong bullish stance on the market's future trajectory.