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Will a correction in the Magnificent Seven end the bull market?

Another strong month for technology majors propelled US stock indices to all-time highs. The outlook remains positive, supported by inflation approaching the 2% target.

Specifically, in May 2024, the nation’s personal consumption expenditure (PCE) price index was unchanged from April, while the core PCE index rose by 0.1%.

Of course, one swallow does not make a summer, but other indicators suggest that the regulator is getting closer to changing monetary policy:

Consumer confidence fell -1.3% to 68.2 in June from the last reading in May, as concerns about the effect of high prices and weakening incomes increased.

The ISM manufacturing index fell for the third consecutive month to 48.5% in June, and core capital goods orders experienced their largest drop this year.

For now, however, Fed members remain cautious about possible rate cuts. Jerome H. Powell warned against overreacting to economic signals. Let’s see how it turns out…

What will happen if the Fed maintains its hawkish stance until the third quarter?

It could pressure households and highly leveraged companies, especially zombie companies, which survive only on new loans whose prices have skyrocketed recently.

Because of the strong uptrend in the S&P 500 and the Nasdaq, one would think that so far, it has not been a major problem. And maybe it hasn’t been for the big tech companies.

Against the backdrop of uncertainty about the future of monetary policy reversal and its potential impact on the economy, investors prefer to stay in blue chips.

This behavior has led the IT and communication services sectors to account for 41.6% of the market value of the S&P 500, a level not seen since 2000.

Common sense suggests that any stumble by these large companies could have market-wide repercussions. However, Nvidia stock’s recent correction has not demonstrated this.

Yes, it pushed indices into the red, but A) not for long and B) not significantly. Moreover, investors have not just been cashing in but betting on small—and mid-cap stocks.

Where does all this lead us?

The hope of an early interest rate cut keeps markets in a positive trend, although investors are not rushing into all stocks but rather into a few large ones in the technology sector.

Increasing concentration could threaten the stability of the market as a whole. Still, for now, each correction is met by buying the broadest stocks or a cautious move to alternatives.

This article was written by FL Contributors at www.forexlive.com.

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