MW There's an important market indicator that suggests investors remain wary. It's good news for stocks.

By Jamie Chisholm

Sector correlations are way above average as traders await clarification on a number of issues

It's looking very likely that Friday will bring a fresh record high for U.S. stocks. And yet there are still signs of nervousness.

Nicholas Colas, co-founder of DataTrek Research, a research boutique, looks at intra-market correlations as a gauge of sentiment - and he reckons that indicator suggests traders remain wary.

Correlation measures how closely two variables, in this case stock sectors, track each other. A correlation of positive 1 signifies a perfect linear relationship in the same direction. Negative 1 represents a perfect linear relationship in the opposite direction. A correlation of zero indicates no statistical relationship.

Colas observes that though all S&P 500 sectors have their own unique characteristics, they will all show a degree of positive correlation to the market over shorter time frames. "This is because they are all ultimately financial assets that are valued on future cash flows, driven to some degree by economic conditions and confidence in the U.S./global financial system," he writes in a note published Thursday.

Colas looked at five sectors - consumer discretionary XLY, financials XLF, health care XLV, industrials XLI and technology XLK - and took their average 30-day trailing correlations of daily returns versus the S&P 500 SPX. From that he created a correlation index.

"When average sector correlations are higher than average, you know the U.S. equity market is under stress from some macro catalyst. Conversely, when correlations are below average, investor confidence is high," he says.

For example, the Federal Reserve's policy mistake in the fourth quarter of 2018 saw correlations move well above the long-run average of 0.81. More recently, the April 2025 tariff shock pushed correlations sharply higher, too.

Conversely, the 2020-to-2021 and 2023-to-early 2025 bull markets saw correlations fall sharply. "When investor confidence is high, market participants aggressively pick and choose potential winners and losers. Sector correlations decline as a result," says Colas.

Currently, sector correlations are around 0.86, which is above the long-run average. Colas reckons this tells us three things. First, the correlation spike to 0.95 during the early April tariff shock was so profound it has reset correlations to higher levels.

Second, Colas says that: "Even with recent gains, investors and traders have not yet grown especially selective about where they allocate marginal capital. The S&P 500 is up 5.1% over the last month, and yet correlations remain above average."

Finally, Colas argues that markets have not fully healed from the April shock. Correlations are still way above average because investors are still worried about issues such as trade policy, inflation and the Fed, and waning U.S. economic growth.

In summary, the S&P 500's levels "seem to be saying everything is back to normal, but correlations tell a very different story," Colas says. "The market is waiting for clarity on a range of topics, and each one has its own timeline. That is a bullish sign, in that resolutions will bring incremental investor confidence."

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y inch up. The dollar index DXY is a bit stronger, while oil prices (CL.1) rose, and gold (GC00) is trading around $3,286 an ounce.

   Key asset performance                                                Last       5d       1m      YTD     1y 
   S&P 500                                                              6141.02    2.90%    3.88%   4.41%   12.46% 
   Nasdaq Composite                                                     20,167.91  3.70%    5.52%   4.44%   13.73% 
   10-year Treasury                                                     4.276      -10.70   -13.20  -30.00  -12.60 
   Gold                                                                 3297.9     -2.56%   -0.46%  24.95%  41.12% 
   Oil                                                                  65.84      -11.08%  8.31%   -8.39%  -19.18% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

U.S. economic data due Friday include the personal consumption expenditure price index for May, released at 8:30 a.m. Eastern. Core PCE is the Fed's favored inflation measure.

The final reading of June consumer sentiment is published at 10 a.m.

Nike shares $(NKE)$ are higher in premarket action after the athletic-gear maker delivered results and forecasts that were not as bad as feared.

The White House said that President Donald Trump's July 9 tariff deadline is "not critical", and Trump said the U.S. and China had just signed a trade deal, which Commerce Secretary Howard Lutnick said referred to the agreement for rare-earth materials to continue to flow to the U.S.

Trump Mobile now says its smart-phones won't be made in the U.S. but will be "designed with American values in mind."

Treasury Secretary Scott Bessent said the so-called "revenge tax" should be removed from the Republican's tax and spending bill.

The Federal Reserve will release the results of the banking stress tests at 4:30 p.m.

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The chart

Is the improved market mood starting to weigh on gold (GC00)? The yellow metal fell Friday as futures indicated the S&P 500 may hit a new record. "Markets breaking out to all-time highs and there goes gold...now below $3,300 with lowest momentum reading this year so far," said Duality Research in a post on X. "For most of this year, gold has stayed in bullish territory (RSI > 50), but now it's dipping below 50 with price right on trendline support. Gold really needs a bounce here to stop things from getting worse," Duality added.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   CYN     Cyngn 
   AAPL    Apple 
   NKE     Nike 
   AMZN    Amazon.com 
   SMCI    Super Micro Computer 

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-Jamie Chisholm

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June 27, 2025 06:36 ET (10:36 GMT)

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