The stock market put its recent woes behind it and broke a two-week losing streak.
The Dow Jones Industrial Average advanced 94.51 points, or 0.5%, to 20,547.76 last week, while the Standard & Poor's 500 index rose 0.8% to 2,348.69. The Nasdaq Co mposite gained 1.8% to 5,910.52, and even hit a new all-time high on Thursday.
That alone was enough to cause worry, as the Nasdaq's strength, driven by a small number of tech stocks, rekindled memories of the internet bubble, when just a few companies propped up the entire market. While it's true that the 10 largest stocks in the S&P 500 accounted for 39% of the market's gains during the first quarter of the year, according to Birinyi Associates data, it doesn't have to be bad news for the overall market. Birinyi's Laszlo Birinyi notes that there have been plenty of big gains that have been buoyed with a small number of stocks, including 1980, 1998, and 1999, when the S&P 500 posted gains of more than 19% despite the top 10 stocks being responsible for at least 40% of the move. "Our view is that it is another statistic that has no investment implications," he says.
The truth is more complex. Wellington Shields technical analyst Frank Gretz notes that only 25% of stocks in the S&P 500 are above their 10-day moving averages, suggesting a good portion of the market is suffering a short-term correction, perhaps explaining the queasy feeling so many investors have right now. But 75% of S&P 500 stocks remain above their 200-day moving averages, which may be evidence that a sizable number remain in long-term uptrends. He also points to the advance-decline index—a measure of rising stocks versus falling ones—which closed at an all-time high on Thursday, and is something that typically precedes a market peak by six months or more. "Markets don't get into trouble that way," Gretz says.
Which isn't to say there aren't worries. In Washington, Treasury Secretary Steve Mnuchin talked up tax reform, which the market would love to see, but President Donald Trump also rebooted his nationalist agenda, including the possibility of more tariffs on steel. That would be great news for U.S. steel makers like United States Steel (ticker: X), but not so great for the rest of the market.
Sunday the French vote in the first round of their presidential election, and the outcome could have a big impact on the market this coming week, says Morgan Stanley strategist Michael Wilson. A win by hard-left candidate Jean-Luc Mélenchon and hard-right candidate Marine Le Pen could cause a sizable drop in the market, he says, while a victory by mainstream candidates François Fillon and Emmanuel Macron could bring a jump. A mixed outcome would probably have little impact (see European Trader). Whatever happens, getting past the election will allow investors to focus on fundamentals. "We think this is the last major risk event before summer, after which we can have the next move higher," Wilson says.
Don't be surprised if earnings are the driver. Of the 95 S&P 500 companies that have reported earnings this quarter, 75.8% have topped analyst forecasts, above the four-quarter average of 71%, according to Thomson Reuters I/B/E/S, while 62.1% have topped analyst revenue expectations, well above the 53% average over the last year.
Yet, the political noise overshadowed earnings last week. With companies like Caterpillar (CAT) and Coca-Cola (KO) reporting this coming week, don't expect that to last.