It’s hard to complain about the stock market’s first half performance and how it sets investors up for the rest of 2024 – hard, but not impossible. A 15% year-to-date total return in the S & P 500 is the 21 st best run through June since 1900, according to Goldman Sachs. Among years when the index was up at least that much at this point, the rest of the year was up 72% of the time for a median further gain of almost 9%. The reward collected by investors in big-cap American stocks per unit of risk has been extraordinary, the 12-month Sharpe ratio for the S & P 500 (return compared to statistical volatility) more than three times the long-term average. The S & P 500 since the October 2023 correction low is up 33% for an annualized total return pace of 56%. Not only has the index’s smooth ascent allowed its owners to sleep well at night, the extreme calm has meant it’s been safe to snooze right along with the market during the day. The S & P has gone eight sessions without a move of as much as half a percent. Its worst daily decline during June was a negligible 0.4%. The CBOE Volatility index is near a multi-year low around 12, yet that seems positively rich compared to the S & P’s realized volatility over the past 30 days: just above 7, in VIX terms. There’s not much on the surface to dislike here, but that shouldn’t keep us from looking. Market worries The most popular objection to this happy story got that way from being the most obvious: The stellar returns have largely come from a relative handful of huge-cap companies, with the typical ticker dawdling far behind. True in magnitude: The market-cap-weighted S & P 500 has outgained its equal-weighted version by more than ten percentage points this year. Without Nvidia’s pileup of an additional $1.8 trillion in market value since Jan. 1, we’d not be dishing out so many superlatives about the rare and rosy 2024 market performance. I’m long on record as arguing that narrower rallies are still legitimate ones, that money is chasing a scarce supply of high-conviction secular growth that is landing disproportionately on the fundamentally strongest and macro-insulated companies. I’ve also made the case that the prevailing tone of frustration and grievance among investors toward this top-heavy rally phase has in a way helped sustain a beneficial wall of worry that otherwise would not exist in a market making 30-plus record highs in six months. What’s more, the equal-weight S & P is running at a 9% annual return pace this year – not stellar but not outright weak either. It would be more worrisome if the traditionally defensive sectors were beginning to outperform to deliver a sobering economic signal. Credit conditions have grown a bit less sturdy in recent weeks, though from extreme strong levels. Jeff deGraaf, founder of Renaissance Macro, has argued that the powerful “breadth thrust” of the fourth-quarter rally brought with it positive implications for gains three-, six- and 12 months out. The three- and six-month projections were met, which leaves him expected upside persistence – with hiccups along the way – into the fourth quarter of this year. All this remains the case, perhaps the most credible base case in fact – and yet, the perverse internal dynamics in this market could be building more hazardous extremes that could make the tape more fragile under a bout of stress. Not only haven’t up days been broadly inclusive, the direction of the S & P 500 has been running inverse to the daily breadth over the past month. Sure, this is partly a quirk of the very index concentration we already have noted (three stocks worth 20% of the S & P), but still shows a certain sub-surface dissonance. The extreme tendency of individual stocks to go their own way often independent of the S & P is illustrated by the CBOE Implied Correlation Index here. It measures the market-based expected volatility of large index members against that of the S & P 500 itself. This is both an observed pattern and an active tactical strategy. The so-called dispersion trade – shorting index volatility while owning single-stock volatility typically via options – has grown popular. It goes without saying that a burst of market-wide stress would upend such trades, to unknown knock-on effect. Momentum stumble A separate but related bit of weather has been the recent sprint-and-stumble performance of high-momentum stocks, which peaked more than a week ago as Nvidia reached a buying crescendo. This break of stride in the “momentum factor” resembles, in some respects, what happened in early March with a very similar reversal in Nvidia. That month, the market held near highs for a while through some salubrious rotation among the Magnificent Seven and the remainder of the market. Until late March (the very end of the prior quarter), when the broad tape peaked and the 5% S & P 500 pullback – the only notable drawdown in eight months – ensued. That setback in an overbought market at quarter’s end coincided, of course, with a bit of a macro scare. Treasury yields broke higher out of a range, the 10-year racing toward 4.5% as hot inflation readings forced a rethink of the Federal Reserve’s rate-cutting path and the obvious questions about whether the economy could weather “higher for longer” rates. This past Friday, as the quarter closed with a new intraday high, the index sagged through the day despite a friendly PCE inflation report, while Treasury yields ticked back above 4.3%. Whether election-handicapping traders grew mindful again of the fiscal setup should the Trump tax cuts be extended or what, the interplay bears watching. More broadly, of course, the macro inputs have been softer but largely benign, consistent with an economy decelerating toward some version of a soft landing, with oil prices in check, earnings forecasts making new highs and inflation down enough to confer some flexibility on a data-dependent Fed. Investors still can’t be sure whether the Fed’s patience in holding rates at cycle highs since last July will outlast the market’s ability to wait for an “insurance” rather than an “emergency” easing move. Other nagging items to ponder: Wall Street strategists have been hustling to jack up their year-end S & P targets (though they in general remain subdued), depleting the reservoir of skepticism that has nourished this bull market. Extreme hostile reactions to earnings disappointments in big-cap stocks hints at pockets of unreasonable expectations (Micron) and spring-loaded reflexive selling in fallen bellwethers (Walgreens, Nike). This as second-quarter consensus estimates have not been pared back to lower the hurdle over the course of the quarter, as they typically are. Outsized but justified attention on mechanical and structural machinations hints at a market that is, in a sense, outgrowing its shell. We’ve spent weeks treated to intense analysis and fevered chatter about massive options-expiration influences due to the gusher of retail call-buying in tech. How big is the dispersion trade? The long-short momentum “factor” has whipped the tape around on its own some days. Not to mention huge index rebalancings and the distortive effects of diversification rules, requiring a big swing in the weightings of Apple versus Nvidia in the Technology SPDR . In 2018, Standard & Poor’s felt forced to revamp the Communication Services sector to house some big names engorging the tech sector (Meta, Alphabet, Netflix). Tech was trimmed back to 20% of the index from 26%; today it’s at 32.5%. None of this is directionally predictive for equities, and one should never scapegoat “the machines” or “quants” for what’s ultimately an asset market pricing in economic reality. Still, it’s easy to observe greater friction these days between the underlying market and the vehicles being used to ride it.