A Roadblock Halts the S&P 500's Winning Streak

Wall Street's optimism towards stocks waned following a four-day rally that marked the market's longest winning streak since March. Equity markets experienced fluctuations, with the S&P 500 remaining below the 5,200 level it briefly touched earlier in the week.

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Among the megacap stocks, Nvidia Corp. saw gains while Tesla Inc. faced declines. Intel Corp. suffered a setback after revising its revenue outlook downward due to a US ban on chip exports to Huawei Technologies Co. Meanwhile, Uber Technologies Inc. witnessed a decline in response to disappointing first-quarter bookings.

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According to strategists at Bespoke Investment Group, these developments provide a convenient excuse for investors to pause and reevaluate their positions after the recent rebound. Citigroup Inc. strategists noted a lack of conviction among investors to fully embrace the recent uptrend in US stocks, suggesting that the market is yet to exhibit a fully bullish sentiment. Despite a recent unwinding of short positions, the S&P 500 remains predominantly positioned for long trades, but investors seem cautious about adding to their bullish positions.

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The S&P 500 hovered around 5,185 while Treasury 10-year yields edged up by two basis points to 4.48%, ahead of a $42 billion US auction of bonds scheduled for Wednesday. After a brief setback last month, equities resumed their upward trajectory in May, fueled by robust corporate earnings and speculation regarding potential rate cuts by the Federal Reserve later in the year.

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However, Matt Maley at Miller Tabak + Co. highlighted that the recent market rebound has been relatively narrow, suggesting that a broader participation across sectors would be more favorable. Despite a 20% rally in the S&P 500 from October to April, pushing valuations to historically high levels, traders are seeking justification for these lofty valuations and are eager to witness sustained growth.

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David Bahnsen, chief investment officer at The Bahnsen Group, pointed out that the recent market rally is driven more by the fear of missing out rather than confidence in fundamentals. With no anticipated rate cuts until July or September, and the next earnings season still two months away, there are limited catalysts to drive the market in the near term, aside from speculation around various economic data points.

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Upcoming inflation figures will provide further insights into the US economy following recent employment data indicating a cooling labor market. Bahnsen remains optimistic about energy and consumer staples in the US markets, particularly where there is clear and sustainable dividend growth.

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In the meantime, utilities companies have outperformed the S&P 500 since the market bottomed last month, signaling a defensive shift among traders. This could pose a challenge for bullish sentiments in the short term if traders continue to favor bond-proxy sectors as leadership stocks. The utilities sector, known for its consistent dividend payments, has surged by 11% in the past 15 sessions, a rate not seen since the height of the pandemic in 2020.

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