(Bloomberg) — Stocks struggled for direction in the final stretch of a strong quarter that’s seen a small group high-flying technology shares lead the way.

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A renewed bout of volatility hit Nvidia Corp., which slipped during its annual shareholder meeting. The poster child of the artificial-intelligence frenzy has been on a roller-coaster ride, mostly driving broad-market direction. Fellow megacap Amazon.com Inc. reached a $2 trillion valuation in a rally that took the e-commerce giant deeper into record territory.

A recent market attempt to broaden out of the megacap group was short-lived, with a bevy of measures still showing how market breadth remains weak — boosting uncertainty about the rally’s staying power. Bifurcation between S&P 500 performance and breadth has reached one of the worst levels in three decades, according to Bloomberg Intelligence.

“The stock market is way too reliant on big tech — period and end of story,” said David Bahnsen at The Bahnsen Group. “Whether or not the past week’s volatility in tech is the start of something deeper or if that reckoning is still forthcoming remains to be seen, but excessive investor sentiment, euphoria and overdone momentum always ends the same.”

The S&P 500 hovered near 5,470. Micron Technology Inc.’s more than $62 billion artificial intelligence-driven rally will face a test when it reports earnings after the closing bell. FedEx Corp. surged on a bullish forecast and buyback plans. The Federal Reserve will release the results of its annual bank stress tests later Wednesday.

Treasury 10-year yields topped 4.3%. A $70 billion sale of five-year notes showed signs of strong demand. The dollar hit the highest since November. The yen’s slide to the weakest since 1986 is boosting risk of intervention.

“The market’s ‘Engine Warning Light’ is on as we head into the hot summer months,” said Craig Johnson at Piper Sandler. “Investors in the tech-heavy indices are experiencing F.O.M.O, while investors in the rest of the market feel R.O.M.O (regret of missing out) as overall market breadth remains weak outside a handful of mega-cap stocks. We believe the S&P 500 is overdue for maintenance.”

The S&P 500 is on track to deliver a strongly positive performance for the first six months of the year, fueled by a rally in the market’s largest names. Dividing the 500 Index stocks by capitalization quintiles shows a steady stairstep pattern of performance: the larger the stock, the better it did, according to Jack Ablin at Cresset.

“Much of the divergence is attributable to a ‘higher for longer’ interest rate environment,” Ablin noted. “Investors reckon that megacap tech companies – thanks to their ability to generate cash – are less reliant on borrowing and, those companies that need to borrow have much easier access to capital than do their smaller brethren. So, where are markets headed in the second half of 2024?”

Ablin expects US equity markets to broaden later this year as the possibility of lower rates comes into focus.

“That means high-quality companies, particularly those with persistent dividend growth, will likely continue to lead their lower-quality counterparts in an incremental restrictive borrowing environment,” he added.

Bloomberg Intelligence’s sector rotation model says its time for a new leadership to emerge — and favors energy, health care and financials as the best-supported sectors to lead the index in the second half.

“Tech and the tech-adjacent communications sector have the strongest price momentum — but waning earnings dominance and lofty relative multiples pushed both groups down our ranks, wrote BI strategists led by Gina Martin Adams.

Mark Haefele at UBS Global Wealth Management, says that while Nvidia’s volatility has driven sentiment, the structural investment case for artificial intelligence remains intact on positive AI adoption and monetization trends. He also holds a constructive outlook for broader equities amid solid fundamentals.

“We maintain our positive view on the AI story, but believe rightsizing tech exposure is key to navigate volatility while maintaining strategic exposure to the technology that we think is set to drive growth in the coming years,” he added.

For the second-quarter earnings season, the “Magnificent Seven” megacaps are still expected to account for the bulk of the growth for the overall S&P 500, according to Ryan Grabinski at Strategas.

“What remains encouraging to us is that the estimates for the remaining 493 are improving starting in the third quarter as growth rates for both the top of the market and the rest of the market normalize,” he noted. “Should this broadening come to fruition, it would be an encouraging sign for the sustainability of the bull market.”

The S&P 500 is on pace to enter the second half with a gain of about 15% since the start of 2024. And July has ranked as the strongest month of the year for the S&P 500 both since its inception and more recently over the past two decades, according to data compiled by Bespoke Investment Group.

“What is more interesting is that zeroing in on the past 20 years, July’s outperformance is the eye of the storm,” Bespoke noted. “July is sandwiched between June, August, and September — which all rank as the three worst months of the year averaging declines of 0.17%, 0.10%, and 0.7%, respectively.”

Corporate Highlights:

  • Interactive Brokers Group Inc. took a $48 million hit after a New York Stock Exchange trading disruption this month and is considering its options to recover the money, including possible legal action.

  • Whirlpool Corp. surged after Reuters reported that Robert Bosch GmbH is considering an offer for the appliance maker.

  • A top McDonald’s Corp. executive reiterated that the company’s previous US test of plant-based meat didn’t work out and added that the burger chain’s diners don’t go to its restaurants for salads. Beyond Meat Inc. has partnered with McDonald’s to produce the McPlant burger.

  • Moderna Inc. shares sank after new data showed the efficacy of its RSV shot fell sharply in the second year and was lower than that of rival vaccines.

  • General Mills Inc., the maker of Cheerios, gave a disappointing sales outlook as shoppers continue to pull back amid climbing supermarket prices.

  • Southwest Airlines Co. reduced its estimate for unit revenue in the second quarter, a sign of ongoing challenges at the carrier as it fends off an activist push for a management overhaul.

  • Volkswagen AG is taking another swing in its long struggle to catch up with Tesla Inc., plowing $5 billion into a tie-up with the US company’s closest would-be rival, Rivian Automotive Inc.

  • Airbus SE has been warning airlines that some of their aircraft deliveries due in the next two years risk being delayed, an indication that supply-chain glitches at the world’s largest planemaker might extend well beyond the current year.

Key events this week:

  • China industrial profits, Thursday

  • Eurozone economic confidence, consumer confidence, Thursday

  • US durable goods, initial jobless claims, GDP, Thursday

  • Nike releases earnings, Thursday

  • Japan Tokyo CPI, unemployment, industrial production, Friday

  • US PCE inflation, spending and income, University of Michigan consumer sentiment, Friday

  • Fed’s Thomas Barkin speaks, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 was little changed as of 2:42 p.m. New York time

  • The Nasdaq 100 was little changed

  • The Dow Jones Industrial Average was little changed

  • The MSCI World Index fell 0.2%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4%

  • The euro fell 0.3% to $1.0678

  • The British pound fell 0.5% to $1.2623

  • The Japanese yen fell 0.6% to 160.70 per dollar

Cryptocurrencies

  • Bitcoin fell 1.6% to $60,916.1

  • Ether fell 1.4% to $3,361.5

Bonds

  • The yield on 10-year Treasuries advanced seven basis points to 4.31%

  • Germany’s 10-year yield advanced four basis points to 2.45%

  • Britain’s 10-year yield advanced five basis points to 4.13%

Commodities

  • West Texas Intermediate crude was little changed

  • Spot gold fell 0.9% to $2,299.03 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Alexandra Semenova.

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