TERADAT SANTIVIVUT
Barclays outlined that the S&P 500 (SP500) implied volatility has dropped to historically cheap levels comparative to sector vol, signifying that fundamentals are in the “hot seat” as Wall Street heads into the summer months and second half of the trading year.
The financial institution highlighted that this is a potential risk for stocks as EPS estimates continue to fall for the majority of the S&P 500.
Barclays stated that sector underweights going into 2023 supported the outsized year-to-date tech gains as market participants focus shifted toward balance sheet strength and the escalating hype around AI.
“However, the closing of these underweights and the extraordinary narrowness of the resulting rally means positioning is unlikely to continue standing in for fundamentals as we enter 2H,” Barclays said in an investor note on Friday.
“In our view, this poses a risk for equities as: 1) such a highly concentrated equity rally typically foreshadows a near-term pullback, and; 2) aside from AI beneficiaries, earnings estimates for the rest of the S&P 500 continue to weaken.”
Looking at Friday’s price action on Wall Street and all three major market indices have pushed up into the green in early trading which has provided support for the mirroring exchange traded funds which include the SPDR Dow Jones Industrial Average ETF Trust (DIA), S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO), and the Invesco QQQ Trust ETF (QQQ).
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