Summer Rally Ahead? Goldman Says So, but Tech Stock Concentration Raises Concerns

Goldman Sachs forecasts a substantial influx of cash from passive equity allocations to flood the stock market in early July, potentially fueling a continued rally through the early summer. In a latest report released on Wednesday, Scott Rubner, Goldman's global markets division managing director and tactical specialist, stated that "New quarter (Q3), new half year (2H), this is when a wall of money comes into the equity market quickly."

Additionally, share prices are anticipated to benefit from strong seasonal trends and rising engagement from retail investors, according to Rubner. The first 15 days of July have historically been the best two-week trading period of the year for equities, andtypically fade after July 17. Since 1928, the S&P 500 Index has been positive for nine consecutive Julys, with an average return of 3.7%, while the Nasdaq 100 Index has an even better record, posting gains in 16 straight Julys, with an average return of 4.6%.

The Bank of Canada cut its key policy rate on Wednesday, marking the first such move among the G7 countries. Some economists foresee another cut in July, despite financial markets pricing in a 39% chance of a reduction to 4.50% next month. The European Central Bank also followed suit on Thursday.

Recent weak economic data has also lifted expectations for a U.S. rate cut. On Wednesday, the ADP National Employment Report for May showed weaker-than-expected job growth, further indicating a cooling U.S. labor market. This followed a Tuesday report revealing that U.S. job openings in April fell to their lowest level in over three years.

The yield on the 10-year U.S. Treasury note dropped to a two-month low on Wednesday, marking five consecutive days of decline and a cumulative drop of over 30 basis points in one week. According to the CME FedWatch tool, traders now see a roughly 68% chance of a Federal Reserve rate cut in September, up from about 50% a week ago, further boosting U.S. stock markets.

The concentration of the top three companies in the S&P 500 index is at its highest level since at least 1980, according to a post by Charlie Bilello, chief market strategist for Creative Planning. Some analysts are warning that the high concentration in the tech sector could be a sign of overvaluation and potential market risk. Sean O'Hara, president of Pacer ETFs Distributors, noted that "Narrow leadership like now happens from time to time but it never lasts."