US markets ended higher on Wednesday but the Dow Jones emerged as the outperformer as investors chose to rotate out of Megacap tech stocks into banking names and smallcap stocks.
The Dow Jones gained nearly 350 points overnight, recovering all the losses it had during Tuesday’s trading session to end at a record closing high. The S&P 500 gained 0.5%, while the Nasdaq underperformed, ending 0.3% higher.
Morgan Stanley, a key component of the Dow Jones, ended 6.5% higher post an earnings beat. United Airlines shares also surged over 12% after reporting better-than-expected numbers.
Investors also rotated out of megacap tech names, most of which barring Nvidia declined overnight. The smallcap Russell 2000 index hit the highest level in three years.
Billionaire Stan Druckenmiller said markets are pricing in a Donald Trump victory ahead of next month’s presidential election. In a Bloomberg Television interview, he said “you can see it in the bank stocks, you can see it in crypto.”
Most US banking stocks are up between 10% to 20% over the last one month, while Bitcoin prices too have risen 17% during this period.
“We recently upgraded small caps to neutral vs large caps after a persistent 3 1/2 year period of underperformance,” according to Nicholas Lentini at Morgan Stanley and his colleagues. “This decision came on the back of the strong September jobs report and the Fed’s decision to deliver a 50 basis-point rate cut at last month’s meeting.”
For them to get outright bullish on small caps, leading macro indicators would likely need to reflect a clear acceleration in growth.
The S&P 500 has already set 46 closing records this year, and according to the trading desk at Goldman Sachs Group Inc., that rally is primed to extend into the final months of 2024.
Scott Rubner, a managing director for global markets and tactical specialist at the bank, estimates the US stock benchmark can finish the year “well north of 6,000.” According to his calculations of data going back to 1928, the historical median of S&P 500 returns from October 15 to December 31 is 5.17%. In election years median returns are even higher, just over 7%, implying a year-end level of 6,270.
(With Inputs From Agencies.)