The market is highly responsive to economic data that disrupts the ‘Goldilocks scenario,’ says Anthony Saglimbene of Ameriprise Financial. On Friday, major U.S. stock indexes rose, with the tech-heavy Nasdaq Composite hitting a fresh record peak ahead of the Memorial Day weekend. Nvidia Corp.’s quarterly earnings were “the most important report of the week,” according to Saglimbene, chief market strategist at Ameriprise Financial. He stated, “I don’t think investors could have asked for a better report and outlook from the leader of AI,” suggesting that “the AI theme has legs.” Both the Nasdaq and the S&P 500 secured their fifth consecutive week of gains on Friday, while the Dow Jones Industrial Average ended its five-week winning streak. Investors were buying the dip amid rising profits and a strong economy, said Saglimbene. Although Nvidia surged Thursday following its robust earnings, U.S. stocks dropped that day due to concerns over economic data from S&P Global’s flash survey of U.S. services. The stronger-than-expected reading sparked “inflation anxiety,” Saglimbene explained. Sticky inflation in the services component of the consumer-price index has been a concern, but Saglimbene believes investors overreacted, as the data likely didn’t significantly alter the Federal Reserve’s policy outlook. “It shows how sensitive the market is to economic data that challenges the narrative of Fed rate cuts this year,” Saglimbene noted, with investors hoping for a “Goldilocks scenario” where economic activity declines just enough to justify rate cuts. On Friday, U.S. stocks finished higher, with the Dow Jones Industrial Average rising less than 0.1%, the S&P 500 gaining 0.7%, and the Nasdaq Composite climbing 1.1%. The Nasdaq closed at a record 16,920.79, while the S&P 500 ended at 5,304.72, just 0.3% below its record close. Traders are debating whether the S&P 500’s current level around 5,300 is a ceiling or a support level for further gains. Saglimbene believes the S&P 500 can “gravitate” higher due to the positive earnings outlook for U.S. companies. Next week’s key economic report will be the U.S. inflation reading for April from the personal-consumption expenditures price index, due May 31. The U.S. stock market will be closed Monday, May 27, for Memorial Day.

In Wednesday’s session, Nvidia Corp. could not counteract the negative stock-market sentiment stemming from the minutes of the May policy meeting of the Federal Reserve. Despite Nvidia’s strong performance in the quarter, the stock markets were unable to rebound on Thursday. Although Nvidia’s stocks soared to over $1,000, both the S&P 500 and Nasdaq Composite saw declines for the day. The DJIA hit 40,000 for the first time last week but fell by 605.78 points on Thursday to close at 39,065.26. This was the biggest percentage drop since March 22, 2023, and the largest point decline since Feb. 21, 2023, according to Dow Jones Market Data. Keith Lerner, who is the chief market strategist at Truist Advisory Services, likened the response to Nvidia’s eagerly awaited report to the market fluctuations typically observed when important economic data, such as employment or CPI figures, is made public. Experts in technical analysis mentioned that the decrease in stock prices that occurred recently, while not appealing, was not completely unexpected due to the market reaching new highs in May after a fall in April. Mark Arbeter, the president of Arbeter Investments and a technical analyst, noted that there was widespread involvement of individual stocks in the market rebound from April 19 to May 15. However, he observed a decrease in this participation in the past six days. He noticed that during the past week, only the technology sector saw growth in value, while other sectors like real estate, energy, financials, discretionary, utilities, and staples all saw declines ranging from 1.3% to 2.7%. The mid- and small-cap indexes had peaked six days ago and were now dropping quickly. Also, indicators of sentiment suggested that optimism was rising to levels that often signal caution for investors. Arbeter informed MarketWatch that after a large rise in the major stock indices, followed by a slight new high, the chart pattern could lead to adverse outcomes. What about the fundamentals? Investors who were already anxious because of the Federal Reserve meeting minutes may have been further worried by the increase in the purchasing managers index, which signaled higher activity in the services sector. The minutes revealed that policymakers were not inclined to decrease interest rates, and in certain cases were even considering raising them if necessary. After economic data was released, Lerner observed that the 10-year Treasury yield rose from a previous low, resulting in downward pressure on sectors like small caps and real estate that are influenced by interest rate fluctuations. He elaborated that our attention is now on the Federal Reserve’s direction. In addition, with the market being relatively calm before Memorial Day, any changes in the market may have a greater impact. Rather than Nvidia’s strong performance influencing the market, it may have been more focused on simply getting the earnings report from the top chip company out of the way. He explained that those who have been betting against the market or holding a negative outlook can now breathe a sigh of relief, as Nvidia’s dominance is no longer a concern. Nobody was willing to go against Nvidia. Some individuals also noted the importance of the approaching extended weekend. Bond markets will have early closures on Friday, and all U.S. markets will be shut on Monday in observance of Memorial Day. In an email, Jamie Cox, a managing partner at Harris Financial Group, mentioned that markets tend to slow down before a long holiday weekend. The release of the Fed minutes caused this slowing down, and not even news from Nvidia could redirect focus to the positive aspects of the market. At the same time, it was not practical to expect Nvidia to save the market, despite high expectations due to its position as the top-performing stock globally, due to deteriorating market conditions. Arbeter humorously mentioned that having a group of five to seven very large stocks could potentially lift the market, but he is skeptical that a single stock alone could have the same impact.

Nvidia’s exceptional first-quarter results have placed the chipmaker at the forefront of the AI revolution, with its market value set to rival the combined value of all German listed companies. According to FactSet, as of Wednesday, companies with primary listings in Germany have a total market value of €2.315 trillion ($2.51 trillion). Nvidia’s after-hours surge to $1,007 per share positions the company to achieve a market value of $2.5 trillion. German companies, from A.S. Creation Tapeten to Zooplus, including BMW, SAP, and Volkswagen, collectively earned €121.56 billion on sales of €2.96 trillion last year, per FactSet data. In comparison, Nvidia earned $42.6 billion on sales of $79.7 billion over the past 12 months, with its first-quarter results exceeding expectations. Nvidia’s revenue and profit growth are impressive, with adjusted earnings per share up 461% year-on-year and sales growth of 262%. For investors looking for broader exposure to the German market rather than a single company like Nvidia, the iShares MSCI German ETF (EWG) tracks an index covering about 85% of the German market cap.

When stocks are climbing and bonds are lagging, it can be difficult to convince investors of the importance of diversification. With the S&P 500 up nearly 12% year-to-date in mid-May and the Dow Jones Industrial Average reaching 40,000, many investors experience “S&P 500 Envy,” comparing their returns to these impressive benchmarks. In recent years, when both stocks and bonds were down, this wasn’t as much of an issue. However, similar conditions in 2018 also sparked “S&P 500 Envy.” BlackRock addressed this by creating a presentation for financial advisors to show that despite sometimes lower short-term returns, diversified portfolios often perform better over the long run. An updated graphic from 2023 illustrates that during years like 2000-2002, 2008, 2020, and 2022, when the S&P was down, diversified portfolios lost less. Conversely, from 2009-2019 and in 2023, when the S&P rose significantly, diversified portfolios grew slightly less. Over time, however, these portfolios outperformed the S&P, proving that “diversification can work, even when it feels like it’s losing.” Nicholas Olesen from Kathmere Capital Management highlights that advising clients on diversification is tougher when the S&P performs well over a long period. He addresses “recency bias,” the tendency to believe that recent trends will continue indefinitely. This bias can lead investors to abandon their diversified portfolios in favor of the booming S&P, only to suffer during downturns. Olesen argues that a mix of investment types is best for the long term, hedging against economic fluctuations. He explains that diversification isn’t about having the top-performing portfolio right now but achieving long-term financial goals. Ross Haycock from Summit Wealth Group echoes this sentiment, reminding clients not to “put all your eggs in one basket.” When investors shy away from diversification, they’re often avoiding bonds due to recent poor performance. However, they overlook the consistent, guaranteed yields bonds provide. Despite short-term market value fluctuations, holding bonds to maturity ensures they retain their value and generate income. This “statement shock” from seeing lower short-term returns compared to the S&P can drive emotional decisions. Advisors stress the importance of focusing on long-term, time-weighted returns and sticking to a well-considered investment plan, rather than reacting to daily market changes. In summary, while the allure of high stock returns is strong, maintaining a diversified portfolio is crucial for long-term financial health, helping to mitigate risks and smooth out the ups and downs of the market.