First, simply looking at the headline indices is misleading. Yes, the S&P 500 is up year to date and the Nasdaq Composite is performing even better, having gained nearly 24% since the beginning of the year. However, this rally is increasingly narrow, driven by just a handful of mega big-cap stocks including Apple, Microsoft and AI-themed stocks such as Nvidia and Alphabet.
US stocks continue to defy bearish predictions, with the key bellwether indices showing remarkable resilience. The S&P 500 has recovered smartly from the lows in March, when stocks tumbled during the height of the regional banking crisis, and is now up 9.5% for the year (at the point of writing). And with record amounts of cash sitting on the sidelines — short-term money market funds are seeing surging inflows, now totalling US$5.3 trillion ($7.2 trillion), according to a recent report by the Bank of America — we suspect more than a few investors must be wondering if they should throw in the towel and capitulate in fear of missing out (FOMO). After all, if stocks continue to rise, so will the cost of holding cash (see Snapshot below). We are not convinced that the worst is over and think caution is warranted based on prevailing risk-reward propositions.
