The bulls need more fuel to move higher

The bull market has been a story of eight to ten stocks for most of the year. The frenzied trade in AI stocks has fueled those gains in that elite group of mega-stocks. But investors need to expand their focus to other areas for the stock market to continue to climb.

Artificial Intelligence (AI) has become this year's buzz words. Even though it has been around for well over a decade, investors have suddenly recognized the potential of this technological advancement. The benefits to productivity and economic growth in the years ahead may be as important, if not more important, as the internet revolution.

As in the dot.com boom, any company that can wag the flag of AI in front of the bull's face has seen its stock price soar. Investors should be warned, however, that there are a lot of companies that are claiming to be in the forefront of AI when they are not. As such, many investors are sticking with the leaders, which they know are leaders in AI. Companies like Google, Meta, Amazon, Microsoft, Tesla, and Nvidia have seen their stocks explode higher as a result.

All this excitement has narrowed the number of stocks that are pushing the markets higher, leaving other sectors in the dust. This works until it doesn't. The dot.com boom and bust comes to mind when looking at the present situation.

Back in the early 2000s, that mania saw investors bid up dot.com stocks to crazy levels only to see the whole thing collapse, cutting the NASDAQ in half or more over two years. That index only recovered its dot.com peak this year.  One way for investors to avoid this danger would be to see an expansion of the number of stocks that are participating in this rally.

In the past week or so, I am starting to see this begin to happen. Small-cap stocks, as represented by the Russel 2000 Index, have been languishing for months and months until recently. This week it has outperformed the S&P 500 Index and even NASDAQ. I have also noticed that financials, industrials, basic materials, mining and metals, and precious metals were also seeing some interest. That is encouraging.

Many investors, wary of adding even more money to the "Mega-Cap 8," seem to be searching for alternative equity investments, especially if the Fed engineers a soft landing in the economy. All the above sectors would benefit under that scenario, as would the energy patch. A continuation of this rally is dependent upon good news next week.

We have three important events coming up--the Consumer Price Index (CPI), the Producer Price Index (PPI), and the Federal Open Market Committee (FOMC). The consensus view is that the CPI and the PPI will both come in lower for May. The FOMC meeting is expected to result in a pause in interest rate hikes. Skipping one month of increases will also be read as a positive by the markets.

Higher inflation numbers might cause the Fed to change its mind and raise interest rates again, which, as you might guess, would be taken negatively by the market and precipitate a sell-off. I don't think that will occur. However, we have already reached my low-end target on the S&P 500 Index at 4,325 (intraday). I said we could hit 4,410 or so if the stars are aligned and the data cooperate. Nonetheless, I suspect we will see some pullback in the markets in the weeks ahead once we climb a little higher.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.