Mike Cho, Senior Research Analyst, Nasdaq Capital Access Platforms
Tony Kristic, Senior Research Analyst, Nasdaq Capital Access Platforms
Key Points
- Equities recovered from early June losses as strong Nasdaq-100 expected EPS growth rates contend with Fed rate hike concerns
- U.S. small cap returns hovering around +1 standard deviations relative to U.S. large caps last six months
- Stock-bond return correlations recently hit 88%—highest in at least 30 years—while U.S. equity dispersion is in “extreme” territory
Biweekly Chart in Focus: Nasdaq-100 estimated EPS growth rates YTD by month, 2023-2026
Source: Bloomberg
Summary
A combination of macro forces and positioning dynamics likely drove a sharp de-risking in U.S. equities in early June as the Nasdaq-100 Index® (Nasdaq-100®) and S&P 500 fell 7% and 4.5%, respectively, from June 2nd to June 10th. The Nasdaq Philadelphia Semiconductor Index (SOX)—the epicenter of the recent equity highs—had its largest daily drop since the onset of Covid. After the strongest 2-month gain on record since 1994 (69.1%), the SOX fell 10.3% on June 5th following stronger than expected May non-farm payrolls (NFPs) which increased market pricing of Federal Reserve rate hikes by year’s end. A hawkish FOMC meeting on June 17th then further firmed these expectations.
From a positioning perspective, Bank of America Securities noted the largest weekly net outflows as a percentage of S&P 500 tech market cap since early 2014. This was perhaps in anticipation of the record-setting SpaceX IPO as investors took profits on gains in the tech area to raise cash and open space in portfolios.
Equities quickly recovered as the U.S. and Iran signed an interim peace agreement to open the Strait of Hormuz which would allow the flow of oil and energy commodities to resume. Stepping back, in contrast to the 2023 to 2025 trend, the Nasdaq-100’s 2026 estimated EPS growth rate has risen over the first half of the year, fueled by the AI theme—see the Biweekly Chart in Focus above. The durability of corporate earnings, thus far, continues to underpin the equity markets and keep corporate bond yield spreads in check. The flip side is that it’s a small margin of error should earnings not live up to expectations, particularly as equity valuations remain elevated.
Concurrently, equity-bond return correlations set new 30-year highs—a challenge for portfolios which we believe will remain an issue based on our conversations with retail and institutional investors alike. Extreme dispersion levels suggest meaningful divergence in how individual stocks and sectors are performing, making selectivity paramount amidst narrow market leadership.
Details
Improved U.S. labor market, persistent inflation, and a hawkish FOMC catalyze Fed rate hike expectations
As we outlined in our prior piece, the markets pivoted to refocus on the latest Tier 1 U.S. economic data points:
- May 2026 NFPs exceeded expectations (172,000 vs. estimates of 88,000 and the prior two months were revised higher by 93,000 combined), taking the 3-month moving average to 188,000 and its highest since March 2024 (Figure 2).
- Higher CPI—headline at a 3-year high of 4.2% YoY as energy drove about 80% of the gain; core (ex-energy and food) was 2.9% from 2.8% YoY—and elevated PPI inflation readings as the energy supply shock weighs on both consumer and producer prices (Figure 3).
Figure 2: NFP 3-month moving average at its highest since March 2024
Source: Bloomberg
Figure 3: Consumer & producer inflation readings have trended higher
Source: Bloomberg
Resilient U.S. economic data and still sticky inflation put upward pressure on the market pricing of the Fed rate trajectory. Per Figure 4, markets were pricing in a full 25-basis-point hike by December following the May NFPs (red). Those expectations downshifted slightly as the U.S. and Iran neared a peace deal.
However, following the Fed meeting on June 17th—Kevin Warsh’s first as Fed Chairman—where rates were left unchanged (3.50%-3.75% range), market pricing moved firmly back to at least one full rate hike (green). The initial read-through was a hawkish tilt given the emphasis on “price stability” (i.e., its inflation mandate) and as 9 out of the 18 FOMC members foresee at least one 25 basis point increase this year (Chair Warsh did not submit a rate forecast). This points to the Fed further transitioning from an easing bias to more hawkish mindset in the near-term.
Figure 4: Number of 25 basis point Fed rate hikes/cuts priced in by the end of 2026
Source: Bloomberg
Watching for signs of a broadening in equity returns
Stepping back, though, U.S. corporate credit spreads relative to Treasurys remain tight which speaks to the health of the U.S. corporate sector. As equity volatility has settled following a spike during the onset of the U.S.-Iran war, credit spreads have remained in a tight range (Figure 5).
Figure 5: U.S. corporate spreads remain in check
Source: Bloomberg
As we also noted in our prior piece and over the past year, accommodative financial conditions are a tailwind for risk-taking. Factoring in the aforementioned strong corporate earnings backdrop and tight corporate credit spreads, investors have rewarded higher beta parts of the market. Although off its recent relative highs, the U.S. Nasdaq Small CapTM Index (NQUSSTM) has hovered around +1 standard deviations above its average 6-month rolling relative return versus the U.S. Nasdaq Large CapTM Index (NQUSLTM).
Aside from the volatility during Covid, small caps have not been able to sustain above the +1 standard deviation level for the past 10 years. With an estimated 32% of the Russell 2000 having floating rate debt versus less than 10% of the S&P 500 (per Bloomberg), the directionality of the Treasury 10-year yield remains a key consideration.
Figure 6: U.S. small caps have hovered in the +1SD range relative to large caps. But have failed to maintain above this level of relative outperformance
Source: Bloomberg
With U.S. equities having erased most of their early June losses as of this writing, investors are rightfully focused on valuations. As we’ve discussed on numerous occasions, the prospect of strong corporate earnings growth—which has led to forward price/earnings ratios compressing over the past year—has kept investors buying despite valuation levels sitting above long-term averages.
Figure 7 shows the elevated absolute valuation levels for equities. While U.S. large cap and international (driven by emerging markets) equity valuations trade at a premium versus 10-year averages, their current relative valuations remain below where they were in mid-2025. The risk is that earnings expectations do not deliver which would leave markets vulnerable given the elevated valuation levels in the U.S.
Figure 7: Next 12-month P/Es vs. 10-year averages
Source: Bloomberg. As of 6/15/26.
Correlations & dispersion remain an important portfolio consideration
We’ve admittedly been leaning on Figure 8 frequently in 2026. Given that we discussed elevated stock-bond return correlations and equity dispersion in our May 8th report, we will not rehash these important portfolio considerations in detail. Yet since it is a recurring theme in our conversations with institutional and retail investors alike, we expect it to remain top-of-mind.
While the 1-month rolling correlation of daily returns has slipped from its May 28th peak, highest in at least 30 years at 88%, stock-bond return correlations still remain high (Figure 8). We expect Treasury yields to remain elevated given the confluence of U.S. fiscal concerns, global supply-driven shocks (e.g., the reworking of global supply chains as the global trade construct shifts, energy dynamics out of the Middle East), and still resilient U.S. growth.
Figure 8: S&P 500 & 10-year Treasury 1-month rolling correlations of daily % returns
Source: Bloomberg. As of 6/12/26.
At the same time, S&P 500 dispersion—a measure of the difference in performance between individual stocks and the broader index—remains elevated. This measure is now over 40 which has only happened twice in the last 10 years: in early April 2025 following the initially punitive U.S. trade tariffs and in March 2020 during Covid (Figure 9). These extreme dispersion levels suggest meaningful divergence in how individual stocks and sectors are performing.
This makes selectivity paramount in a backdrop where the 10 largest companies in the S&P 500 now account for more than 40% of the index—a level of concentration not seen since the mid-1960s (per UBS). The dynamic of a concentrated backdrop paired with high dispersion suggests index-level stability is coexisting with a fragmented market beneath the surface.
Figure 9: S&P 500 dispersion at “extreme dispersion” levels, >40
Source: Bloomberg. As of 6/12/26, weekly. Notes: dispersion index is calculated based on the standard deviation of returns across S&P 500 stocks. While the underlying calculation involves statistical measures that could be expressed in percentage terms, the published index itself is presented as a level for easier comparison over time.
Disclaimer:
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