Fresh meme-stock mania took center stage on Wall Street this week just as the world’s biggest equity market closed out another blistering quarter. 

Yet behind the scenes, softening economic growth is testing bullish investor convictions, while fueling big divides between the strong and the weak across Corporate America.

Dispiriting trends that have been visible for months now — alongside the frenzy for megacap tech stocks and private credit – are on display yet again. Companies with dicey balance sheets have underperformed anew in June. Equal-weighted stock benchmarks — where disruptive AI market leaders have the same weighting as industrial bellwethers — have lagged yet again.

A dose of good news on consumer prices initially boosted sentiment in early Friday trading, with the S&P 500 closing the week little changed. Along the way, warnings have grown that the Federal Reserve is waiting too long to release the economy from its anti-inflationary grip.

Fueling the anxiety: Data that have turned dour all at once. Reports on personal spending, jobless claims and home sales — as well as underwhelming results from the likes of Micron Technology Inc. and Nike Inc. — call into question the sustainability of the soft-landing euphoria. It all adds another variable for institutional pros, who’ve been watching from the sidelines the latest day-trading mania and a presidential election cycle that’s kicking into high gear.

“Cracks are appearing in individual companies and sectors,” said Kris Atkinson, a portfolio manager at Fidelity International, who has reduced risk in his corporate bond funds by scooping up higher-quality obligations. “We expect this to continue and companies with more leveraged balance sheets, cyclical revenues or weak competitive positions look vulnerable.”

The S&P 500 is up nearly 15 per cent in the first half and more than 50 per cent from its bear market bottom, while risk premiums for global corporate bonds have been the narrowest in three years as recently as two weeks go. The margin for error in markets is increasingly slim. That peril was brought home for equity traders in a one-two punch starting Wednesday when Micron and then Nike erased a combined US$40 billion of share value after sales forecasts trailed analyst estimates. 

Surface-calm prevailed with equity volatility hovering near pre-pandemic levels. Despite a slip on Friday, the U.S. dollar closed another week of gains.

Away from another drop in the equal-weighted S&P 500, its fifth in six weeks, euphoric spirits raged at one point in market districts ruled by retail traders. Chewy Inc. and Petco Health and Wellness Co. shares briefly skyrocketed Thursday after Keith Gill — known online as “Roaring Kitty” — posted a cartoon image of a dog on X. Virtually all of the gains had reversed by the close.

At the same time, a Goldman Sachs Group Inc. index that tracks S&P 500 companies with weak balance sheets — combining leverage and profitability metrics — has trailed a basket of strong balance-sheet stocks by around 12 percentage points in the first half of the year. An analysis by Societe Generale SA found that among U.S. large caps, strong balance sheets are besting the opposite by 10 percentage points this year.

ETF investors are also showing the strongest preference this year for investment-grade fixed income over high-yield obligations. Funds rated A or higher attracted $15.7 billions of inflow earlier in June while their junk counterparts saw an inflow of only $1.3 billion, according to Bloomberg Intelligence.

“Low equity volatility is keeping credit spreads compressed, giving the impression that higher interest rates are not impacting companies with weaker balance sheets,” said Andrew Lapthorne, Societe Generale’s head of quantitative research. “We are now starting to see a pickup in our strong balance sheets strategy that has been making gains since the end of March.”

While inflation showed signs of cooling, so did the economy, highlighting the Fed’s challenge of subduing prices without causing a downturn. An index of U.S. pending home sales unexpectedly fell in May to a record low as mortgage rates are hovering around 7 per cent. Recurring applications for U.S. jobless benefits rose to the highest level since 2021 and the government marked down personal spending.

The slew of weaker-than-estimated data prints has sent Citigroup’s U.S. Economic Surprise Index to the lowest since August 2022. It all highlights how elevated interest rates are slowly but surely pressuring demand, by making borrowing more expensive for everything from consumer goods and home purchases to business equipment.

“The market is signaling that investor concerns about credit quality is rising,” said Marty Fridson of Lehmann Livian Fridson Advisors. “This has occurred in the context of fading expectations of Fed rate cuts that would be expected to forestall softening of the economy.”