Worries About a Return of Meme-Stock Mania Look Overblown

Meme stocks are running again, and that’s a bad sign for the stock market, one investment bank says. Maybe so, but if I’m nitpicking, recent action doesn’t look especially meme-y. I’d characterize it more as a tactical trash bounce.

“Return of the Memes Is a Red Flag,” read the title of a July 11 technical-strategy note from BTIG. It pointed out that an index of meme stocks was up 10% in three days, compared with a decline of close to 2% for consumer staples. Over the past 18 months, when the three-day spread between the two has grown that wide, the

S&P 500
has lost an average of 1.5% over the following 20 days.

A decline that small would perhaps be more interesting to day traders than long-term savers. But the note has a takeaway for everyone: A broadening out of this year’s rally is “encouraging,” but a surge among low-quality stocks “often is the tail end of the move.”

Market breadth is a hot topic. The S&P 500 index is up 17% year to date. Seven stocks combining for $11 trillion in market value contributed 73% of the index’s first-half gains, according to BofA Securities. These are

Apple

(ticker: AAPL),

Microsoft

(MSFT),

Alphabet

(GOOGL),

Amazon.com

(AMZN),

Meta Platforms

(META),

Nvidia

(NVDA), and

Tesla

(TSLA).

The Magnificent Seven, as some investors are calling these stocks, trade collectively at 40 times earnings and are skewing valuations higher for index investors. The S&P 500 as a whole goes for a lofty 20 times earnings. The index minus the Magnificent Seven—the Frugal 493?—trades at a more reasonable 15 times earnings.

There’s more to worry about than valuations. Second-quarter financial reports are just ahead, and the consensus has S&P 500 earnings falling 9% from…

..

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