Stocks ticked lower on Tuesday as the second-quarter rally met resistance from economic head winds and signs of stretched positioning.
U.S. equity futures slid after Wall Street was shut for a holiday Monday. Nike fell on inventory concerns while PayPal climbed following reaching a loan accord with KKR. Miners and automakers declined in Europe.
Investors caught between fear of missing out and concerns that markets have run too far, too fast are contending with overblown valuations and economic head winds.
Bullish positioning in U.S. equity futures grew last week, taking it to the most extended levels for the S&P 500 and Nasdaq 100 in data going back to 2010, according to Citigroup strategists.
“In the short run, six to 12 months, we are navigating treacherous waters,” Sebastien Page, chief investment officer at T Rowe Price, told Bloomberg Television.
Growth stocks – particularly those in the tech sector – have been driven by a range of factors, including “positive surprises” on revenues and advertising as well as excitement for artificial intelligence, he added. “That’s all part of the value versus growth equation.”
The path of U.S. monetary policy is another wild card. Federal Reserve Chair Jerome Powell will give his semiannual report to Congress on Wednesday.
Policymakers at the Fed kept interest rates unchanged at their latest meeting but warned of more tightening ahead. Investors also await the outcome of policy meetings in Turkey, the U.K. and Switzerland.
The Fed decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year.
That contrasts with market pricing for some 20 basis points of tightening in the remainder of the year.
“We find it hard to get on board with the current excitement,” Morgan Stanley strategists led by Michael Wilson wrote in a note Tuesday.
“If second half growth re-accelerates as expected, then the bullish narrative being used to support equity prices will be proven correct. If not, many investors may be in for a rude awakening.”
In a choppy morning session, U.S. Treasuries yields erased early losses after an unexpected surge for housing starts in May, the most since 2016.
U.S.-listed Chinese stocks tumbled on disappointment over stimulus measures.
Alibaba whipsawed before trading about 1.5% lower following the surprise replacement of its chief executive and chairman.