As the trading day draws to a close, Yahoo Finance's Josh Schafer joins our live show to discuss the top three takeaways from Monday's market.
The much-anticipated Federal Reserve decision looms on Wednesday, and markets are weathering uncertainty. While the overall market hasn't significantly underperformed, small-cap stocks, the homebuilding sector, and local banks have all lagged, even as yields continue their upward trajectory.
Alphabet (GOOG, GOOGL) stock has been gaining momentum since the company announced it may integrate Gemini AI into Apple's (AAPL) iPhone. The news sparked investor enthusiasm, sending Alphabet's stock price up nearly 5%.
The communications services sector continues to lead the market's gains, outperforming the broader S&P 500 index (^GSPC). In contrast, the tech sector underperforms relative to the benchmark.
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by angel smith
video transcript
Josh Lipton: Stocks are looking to recover from two straight weeks of losses as investors focus on the Fed's decision this week. Josh Schaefer is here with today's takeaways, Josh.
Josh Shafer: Yeah, Josh, I mean, this morning I was perusing various headlines from various financial news networks in Austin. And you would have thought the stock price would go down. The conversation this morning was that we're going to learn that the Fed will probably cut less than we were expecting.
And we may see fewer cuts across the board and perhaps subsequent cuts. It looks like we're already starting to worry about what's going to happen at this Wednesday meeting. We will then look at today's market trends. And that's not what happened.
The S&P 500 rose about 1%. He also rose 1% on the Nasdaq. But what I want to highlight here is the kind of divergence that we've actually seen between the underperformers. So if you look at the stocks that underperformed today, you'll see that small-cap stocks underperformed.
Some home builders are underperforming. There are also local banks that are underperforming. The reason I emphasize this is because of the kind of graph we have here right now.
This is a chart by Mike Wilson of Morgan Stanley. And he was pointing out the different movements we're seeing in small-cap stocks and large-cap stocks in terms of interest rate movements. We find that large-cap stocks are much more resilient to that movement.
I compared last month's interest rates with small-cap stocks. I'm highlighting this because I'm curious to see what happens on Wednesday. If yields continue to rise and overall expectations and lower interest rate cuts are factored in, will we see another day where small-cap stocks fall significantly relative to the S&P 500?
I like to use small-cap stocks because, for me, that's part of the proxy for this soft-landing trade. We're going to have a lot of lower rate trades and small cap stocks are going to take advantage of that. And now they're responding even more. However, the resilience of large-cap stocks that we saw again today may support us depending on how Wednesday unfolds.
Madison Mills: Yeah.
Josh Lipton: Come on, Maddie.
Madison Mills: Well, I just think it's interesting. On Friday, I remember we were talking about how his March day was historically typical for the market to hit its lowest point in 20 years. So, with a bit of seasonality in play, I thought I might be in the green this morning.
But it's always interesting to see the bifurcations that we see in the Treasury. And we can see that the two-year bond yield has risen to its highest level this year. What on earth is going on? These should move in different directions. But that's not the case–
Josh Shafer: At what point do investors care about the 10-year bond yield rising? Basically, it feels like it's been going up relatively consistently over the last month or two, at least on a trend basis, but it's been going up for the last 10 years.
Madison Mills: When should you bite?
Josh Shafer: And when does it actually become important for stocks again? Wilson highlighted 4.35% in his note. I think we're right there right now.
I think it was probably 4.3 4%. But we're now kind of saying we're getting to the point where we start talking about bond yields being higher. And even if you're just a stock investor who owns something like an index, it might be time to start paying attention to it again.
Madison Mills: Yeah.
Josh Lipton: Especially since yields are also trending upwards, Josh. It will be interesting to see the reaction. It's like thinking technology can't compete with that. Name of those interest rates.
Josh Shafer: But Josh, forget that today. What if the AI played? Then it would always work, even if yields rise.
Today, I specifically came across an announcement from Alphabet that I'd like to highlight. It shouldn't be called an announcement. sorry. Reports that Alphabet may be installed Gemini AI may be installed on the iPhone. This caused a big move in Google's stock price, which has since risen nearly 5%.
And this stuck with me because I couldn't name a technology company that needs more AI wins. We needed AI. And I think the rumors, the news, came out. And rather than watch AI announcements and rumors about AI, watch stocks temporarily rise.
And some of those deals didn't really work out. So for me, just seeing the stock price go up in response was impressive. And Apple stock doesn't necessarily fall on this news either.
After reading this report, you can say that Apple is not building its own AI. That's not a good thing. Where is Apple involved here?
Madison Mills: It has not yet entered the AI race.
Josh Shafer: Perhaps it's actually just a smart strategy on Apple's part.
Josh Lipton: Yeah, Josh, what we were talking about off camera was how Evercore was looking at AI capabilities without AI CapEx. Yeah.
Madison Mills: Josh, you also looked at communications services. What is the harvest?
Josh Shafer: Yes, the last point is that I love looking at sectors and just clicking on the year-to-date date in Wi-Fi Interactive. It is very fun. It's a really fun activity for me during the day.
If you look at communication services here, it was up 11% year over year. It was up 2% today. But again, what stands out to me is, Maddie, I thought that was really interesting. Look at what is underperforming, the S&P 500.
The least I would like to add is technology. And this reminds us, when we talk about technology broadly, what's actually in the technology field and what's really in the communications services field. So we can see that the S&P 500 has technically underperformed this year.
But communication services are outperforming that. That's because today we saw the spike that I talked about earlier and the spike in communication services by Alphabet. Meta has had a great year. Netflix has had a great year.
So that's just interesting to me. I feel like we talk a lot about how technology is still leading the market. Technology still leads the market.
be careful. We're not always talking about XLK. Maybe you're talking about the Nasdaq. But we're not always talking about XLK.
Other sectors are also participating here. And it was up 2%, so I was impressed by that.
Madison Mills: This is a great point for individual investors considering the technology of a particular ETF. When you're using the Robinhood app, don't forget to look a little under the hood. Josh, thank you so much. Thank you from the bottom of my heart.
