I love the classic Warner Brothers cartoons. They’re well-made and the humor is sophisticated. One recent night with my twin eight-year-old grandsons, I watched a Bugs Bunny cartoon, “Tortoise Beats Hare” (1941), one of the rare times when Bugs is outwitted by an adversary. The story (you know the plot) made me think of Wall Street.

Financial media loves “story stocks” the way Hollywood loves blockbusters. These companies captivate with their compelling narratives — think meteoric growth, visionary leaders, and disruptive tech.

However, focusing too much on these headline-grabbers is like a studio betting all of its money on an expensive summer blockbuster. While the hype is intoxicating, you could lose your shirt. The lower-budget “sleeper” films can deliver the biggest returns.

So, next time you’re tempted by the glitzy allure of a story stock, remember: sometimes, the best investments are the unsung heroes that never make the front page.

To be sure, the surge of enthusiasm for artificial intelligence (AI) has significantly propelled market gains. The NASDAQ has climbed by 18%, and the S&P 500 has seen an increase of over 14% since the start of the year.

Meanwhile, the commodities sector has struggled, with gold prices dropping and oil prices dipping by more than 1%, settling just above $80 per barrel. Bonds remain relatively stable, with the 10-year Treasury yield holding below 4.25%. This yield began June near 4.6%, but recent softer inflation and jobs data have exerted downward pressure on yields.

And yet, a closer examination of market sector performance reveals a rotation in leadership, underscoring the importance of diversification. Year-to-date, technology stocks have surged by 26%, communication services by 25%, and the utilities, financials, and energy sectors have each risen approximately 11%.

These sector gains reflect not just the robust momentum driven by the AI trend, but also a broadening of leadership into both cyclical and defensive sectors, aligning with my expectation that gains would extend beyond mega-cap tech stocks.

For every mega-cap Nvidia (NSDQ: NVDA) that hogs the media spotlight, there are scores of fast-growing but under-the-radar small- and mid-cap stocks that are poised to outperform.

Indeed, improving market breadth has been reflected in the rising New York Stock Exchange Advance/Decline line (NYAD). A rising NYAD indicates there is broad-based strength in the market, because a larger number of stocks are participating in the upward movement. The trend signals a healthy market where a significant portion of stocks is experiencing positive momentum.

Over the past month, the landscape has shifted, with tech’s lead narrowing and real estate, utilities, consumer discretionary, communication services, and health care rapidly catching up.

The housing sector’s mixed picture…

Let’s look at the bellwether indicator of housing for further clues. The latest S&P/Case-Shiller U.S. national home price index, released June 25, showed an increase of 0.3% in April, matching its growth in March. Nationally, prices rose 6.3% year-over-year in April, down from 6.5% in March (see chart).

Annual price growth slowed in April compared to March in both the 10-city index and the 20-city index. Price growth fell flat as mortgage rates spiked above 7% in April. That said, home prices are currently 47% higher than they were in early 2020.

This data presents a mixed picture. On one hand, rising home prices challenge the outlook for falling inflation, with shelter prices remaining a persistent issue. This trend is likely driven by a limited housing supply, as homeowners are hesitant to sell their low-rate mortgages.

On the other hand, the annual rate of home-price appreciation has seen its first decline in a year. This suggests that high mortgage rates and tight monetary policy are starting to have an effect.

While a sharp decline in home-price appreciation is not expected, shelter price pressures are on track to ease throughout 2024, giving the Fed more leeway to consider rate cuts later in the year. That’s when the laggards of 2023 (e.g., utilities) will shine in 2024.

When the central bank finally cuts rates, the “tortoise” sectors will be poised to zip past the hare.

In the meantime, the main U.S. stock market indices closed mixed on Wednesday as follows:

• DJIA: +0.04%
• S&P 500: +0.16%
• NASDAQ: +0.49%
• Russell 2000: -0.21%

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John Persinos is the editorial director of Investing Daily.

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