Market Rally Pauses US Stocks Retreat

US stocks initiated a short week of trading with a slight decline, interrupting a rally that had propelled indexes to their highest levels of the year.

The S&P 500 witnessed a 0.5% fall, while the Dow Jones Industrial Average dropped over 200 points, representing a 0.7% decrease. Simultaneously, the Nasdaq Composite experienced a marginal decline of 0.2%.

In recent weeks, the major indexes had been steadily advancing as investor enthusiasm for artificial intelligence prompted a surge in megacap tech stock investments. Notably, the tech-heavy Nasdaq Composite achieved its eighth consecutive weekly gain, marking its longest winning streak since 2019. The S&P 500, on the other hand, registered five consecutive weeks of growth, its longest stretch since 2021.

Dave Grecsek, the Managing Director of Investment Strategy and Research at Aspiriant, commented, “The markets have become somewhat overvalued and sentiment-driven.”

Investor sentiment has turned optimistic towards US stocks, reaching the highest level since November 2021, according to the latest survey by the American Association of Individual Investors. However, high levels of optimism among investors can often act as a contrarian indicator, potentially signaling a forthcoming decline in stocks.

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Currently, the S&P 500 stands at a 14% increase for the year, trading at approximately 19 times the projected earnings over the next 12 months, as per FactSet data. This valuation is higher than the multiple of approximately 17 at the beginning of the year and surpasses the five-year average of 18.6. The price-to-earnings ratio serves as a gauge for determining whether stocks are reasonably priced or overpriced.

Turning to economic data, US housing starts for May exceeded expectations, driven by both single-family and multifamily projects. Consequently, shares of home builders experienced gains, with PulteGroup rising by 1.9% and D.R. Horton by 1.6%.

This robust housing market indicator highlights the enduring strength of the US economy, even as the Federal Reserve endeavors to curb inflation through aggressive interest rate hikes. Although the Fed recently maintained interest rates after ten consecutive increases, they signaled their preparedness to raise rates next month should the economy and inflation remain unabated.

Victoria Bills, Chief Investment Strategist at Banrion Capital Management, stated, “We keep anticipating a recession, but all indicators are pointing towards a sluggish recovery from the inflationary spiral. Inflation is expected to persist.”

Fed Chair Jerome Powell has scheduled testimony before Congress on Wednesday and Thursday. Market participants eagerly anticipate any communication from central bank officials that may offer insights into future rate adjustments.

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The benchmark yield on the US 10-year Treasury note eased to 3.726% on Tuesday, down from Friday’s 3.768%. The US markets observed the Juneteenth holiday and remained closed on Monday.

Internationally, Chinese banks made slight adjustments to benchmark interest rates for loans to households and businesses. This move, widely anticipated, is part of Beijing’s efforts to revive its struggling economic rebound.

However, concerns arose among traders regarding the potential indication of weakened global demand, leading to a decline in oil and energy stocks. Brent crude experienced a modest retreat of approximately 0.2%, settling at $75.90 per barrel. The S&P 500 energy sector suffered the most significant setback, declining by over 2% and emerging as the poorest performing segment within the broad index.

Furthermore, US-listed shares of Chinese companies experienced declines, with JD.com and PDD both dropping roughly 7%. Alibaba also faced a decline of 4.5% following its announcement of a new chief executive officer.

Meanwhile, the Shanghai Composite Index decreased by 0.5%, while the Hang Seng Index in Hong Kong recorded a more substantial decline of 1.5%.