Stock Markets: Skimming off the froth

Rebellion in Russia
On Saturday, Wagner Group mercenaries took control of Rostov, a southern city in Russia, and marched toward Moscow. Less than 24 hours after that, Wagner leader Yevgeny Prigozhin declared his rebellion over. U.S. Secretary of State Antony Blinken said the events revealed “cracks” in Russia that “weren’t there before.” As for Prigozhin, Ian Bremmer, president of Eurasia Group, called him “a dead man walking.”

Debts, defaults and distress
There have been 41 corporate defaults in the U.S. so far — the most globally and more than double during the same period last year, according to Moody’s Investors Service. Troublingly, Moody’s expects the global default rate to rise to 5% by April 2024, compared with the long-term average of 4.1%. Analysts blame high interest rates for this tumult.

High demand, low supply
Bitcoin’s price has jumped over the past week and is comfortably hovering above the $30,000 barrier, its highest in two months. Market watchers think it’s pushed up by news that BlackRock is planning to launch a spot bitcoin exchange-traded fund. But CNBC found it’s more likely because large institutional investors are buying bitcoin as liquidity remains low.

[PRO] Markets on an even footing
Markets may have declined last week, but CNBC Pro’s Michael Santoli thinks there’s still a “favorable underlying market trend.” Despite worries about a banking crisis, narrow rallies and speculative stocks, the S&P 500 is still nearly up 15% for the year — which points to a market on even footing, ready to climb further.

Last week wasn’t pretty for U.S. stocks — but that’s not necessarily a bad thing.

Those figures may sound disappointing, but Art Hogan, chief market strategist at B. Riley Wealth Management, thinks it’s just the markets finding their balance after being overbought, meaning that stocks have been trading above what they were worth. As Barclays strategist Venu Krishna notes, “the broader Tech sector appears frothy.” That is to say, even though the S&P technology sector has rallied nearly 40% this year, the rest of the index has remained flat.

Going by both those analysts’ logic, the dip in markets last week, then, may be a positive sign that some of the froth around tech is being skimmed off. (Indeed, Nvidia shares lost 1.9%, Microsoft slipped 1.38% and Tesla sank 3.03% Friday.) Investors, then, can focus again on what’s beneath the froth: The financial health of companies amid inflation and interest rates. Compared with excitement over artificial intelligence, that’s a much better indication of stocks’ long-term trajectory.

On that note, the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation, comes out Friday, and will give a clearer picture of whether the Fed will continue hiking rates after leaving them unchanged in June. Froth is, by nature, hollow: A slight increase in heat will cause it to melt completely.