Inside Markets — Quarter-End Rebalancing

Quarter-end pension fund rebalancing began late last week and should continue for the next 2/3 days. Rebalancing dynamics this month favor fixed income with estimated equity outflows as high as $50B. The rebalancing dynamic is also leading to improved market breadth as the QTD rally in semis and AI beneficiaries triggers portfolio concentration issues with some long-only managers. The durability of the improved market breadth will be tested when portfolio managers conclude their rebalancing efforts. Early last week, we called attention to weak breadth/narrow leadership and how it makes the SPX more vulnerable to macro shocks and even stock-specific disappointments. Recent improvement in market breadth is a welcome development but the connection to rebalancing flows makes us skeptical about it lasting beyond this week. The cyclically-sensitive Russell 2000 (RTY) is the index to watch with an unlikely break above ~2140 as the all-clear signal for broad equity participation.

Next: In addition to core PCE data this Friday, markets will be focused on earnings reports from MU and NKE. MU’s earnings report on Wednesday will be critical update for the AI theme and semis, while NKE’s release on Thursday will provide an important update on global consumption.

The bullish fundamental theme of above-trend GDP growth, positive EPS estimate revisions and a paused Fed remains largely intact for now. And the SPX keeps its bullish technical trend at levels above 5290.