Meta and Nvidia Lift Their Sectors
The Morningstar US Market Index rose 1.6% last week as investors appeared unruffled by the deficit concerns provoked by the Trump administration’s tax and spending bill. However, Tesla TSLA stockholders were less sanguine as the stock price fell nearly 15% on Thursday in the wake of a social media spat between President Donald Trump and Elon Musk. While the stock recovered some of the lost ground on Friday, Tesla dragged the consumer cyclical sector 1.3% lower over the week.
The dominance of single companies was also evident in the top performing sectors with communications services and technology sectors driven by gains in Meta Platforms META and Nvidia NVDA respectively. As the benchmark indexes remain concentrated in a small number of companies, portfolio returns are reliant on the price movements of those companies, many of which appear overvalued while smaller companies and those in more traditional industries remain attractively priced.
Investors Need to Focus
Although this concentration is not new, the challenge is exacerbated by rapid and unpredictable policy changes that are moving asset price movements in real time in a way that is typically only seen during periods of crisis. Such environments provide fertile ground for poor decisions and investing mistakes. It is more than usually important to try to shut out the market noise that surrounds us and focus on making good longer-term decisions. For tips on how to do this check out this article by Morningstar senior behavioral insights researcher, Samantha Lamas.
Jobs Report and Inflation Expectations
Against this background, economic data releases went almost unnoticed with the exception of the nonfarm payrolls report on Friday, which despite being stronger than expected is unlikely to change interest rate expectations according to Preston Caldwell, Morningstar’s senior US economist. However, shorter term Treasury yields rose slightly the news as investors grappled with the possibility of higher inflation. For a more detailed look at the US economy, check out Caldwell’s latest US economic outlook.
Concerns about bonds were also evident from Morningstar’s monthly flow report. This shows that April was the worst month of flows into long-term investments since October 2023 with $47 billion leaving long-term investments, of which $43 billion came from taxable bond funds. Although knee-jerk contrarianism is seldom a winning strategy, evidence of negative sentiment should spark the interest of long-term investors. Dan Lefkovitz does a great job of highlighting the potential opportunities in bonds in this article.
Next Up: May CPI Data
Inflation will be back in the spotlight this week with the latest CPI numbers released on Wednesday. Hot on the heels of better jobs numbers, higher than expected inflation could shift interest rate expectations and consequently asset prices. Tariffs are also likely to gather attention as US trade negotiators meet with their Chinese counterparts in London this week to try to de-escalate the current trade war. Given the ongoing importance of tariffs, Morningstar’s equity research team have conducted a bottom-up analysis of the impact of tariffs on US stocks by sector. You can access a summary of this work here.
US and China Stocks Have Different Valuations
The negotiating teams of both countries have a powerful incentive to announce progress which will likely boost investor sentiment on both sides of the Pacific. However, the difference in valuations between US and Chinese stocks may lead to differing longer-term outcomes. As the US market is priced near Morningstar’s assessment of fair value, further significant gains are less likely to be permanent. In contrast, Chinese stocks remain undervalued despite the 16% gain in 2025 and so are more likely to retain future gains. You can follow all the economic announcements on this calendar.
