As the Rotation Dies, Wall Street Is Blaming the Wrong Flaw in Small Caps

Critics have long pointed to an equity market breadth issue, with a narrow basket of tech giants driving most index returns. While participation improved through the second quarter, the broadening didn’t last long – surging energy prices and tightening financial conditions are reversing the course. With Brent near $108 and the 30-year yield at 5.246%, the thesis that market participation would democratize is breaking down. Fundstrat notes the equal-weight S&P 500 has broken its uptrend as consumer discretionary, health care and financials weaken, “while semis and the Magnificent 7 prop up the SPX and Nasdaq 100.” The Energy Resurgence and the Yield Squeeze Geopolitical issues have, once again, taken the front seat as Iran-backed Houthis reportedly seized Yemen’s Red Sea port of Mocha and advanced toward the Hanish Islands, increasing their leverage over the Bab el-Mandeb Strait . The Strait of Hormuz, through which roughly one-fifth of global oil once passed, remains se...