Good morning, investors. Hope you had a restful Memorial Day.

The most popular narrative of the AI boom is that mega-cap tech is carrying the entire stock market. But in today’s edition we’re unpacking the numbers that tell a completely different story.

The data do not support the bears calling the stock market too “top heavy.” 

The equal-weight S&P 500 just hit a new all-time high on Friday and trades nearly 7% above  its 200-day moving average, suggesting momentum has indeed widened beyond Big Tech and that the bull market remains strong beneath the surface. 

In other words, the average stock in the market is at a higher level than ever before.

While the market-cap weighted index is outpacing its equal-weight peer slightly this year, that gap has narrowed over time. 

More telling is that both indexes have outperformed the Magnificent 7 to start the year, implying that the largest technology companies in the world have actually been more of a drag than a tailwind on the broader market in recent months. 

Over the last three years, strategists from every major bank have warned about a narrow and fragile stock market propped up by a handful of stocks. 

The rally, according to the consensus narrative, was largely a mirage, and an unhealthy one at that.

And yet today the equal-weight S&P 500 trades at a record, and both the Dow and small-cap Russell 2000 hover near all-time highs.

Cyclicals, industrials, regional banks and other unloved corners of the market are participating in the current run.

With another slate of tech earnings this week from Dell, Salesforce and others, the old story would say that any disappointment in expectations would hit the entire market.

But the updated picture says the equal-weight strength should be able to absorb the hit, given that investors have broadened their exposure.   

To be fair, the macro setup does not favor the equal-weight index in a conventional sense.

Oil prices remain elevated, the Iran conflict is still in flux, and bond yields are at multi-year highs — all variables that move the economically-sensitive parts of the market more than mega-cap tech.

But that risk doesn’t stop the top-heavy narrative from being debunked. 

🛢 The US and Iran still haven’t confirmed a peace deal. While early signs suggested a deal was imminent, talks broke down and the US has since launched “self-defense strikes” to start the week. (CNBC)

📈 Bond yields hover at the highest level since 2007. Some strategists are now warning the term premium has rebuilt itself so completely that even a fast Iran resolution will not pull long yields back. (WSJ)

📉 Consumer sentiment hit a record low. The latest University of Michigan gauge fell to its lowest level in 70 years of data, with respondents pointing to stress from higher gas prices and energy costs. The previous lowest level was June 2022, when inflation was at a 40-year high. (Semafor)

🗓 May 26, 1896: Charles Dow published the first Dow Jones Industrial Average. It comprised of 12 industrial stocks at a starting level of 40.94.

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