As Market Narrows, Traders Feel More Squeezed Than Ever
Five stocks make up 29% of S&P's entire market capitalization. That's unsustainable, but what will change it?
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Despite the constant media cheer leading as the indexes keep making new all-time highs, many investors are growing weary of the market action. It is one of the narrowest markets in history.
According to Bianco Research, the top five stocks in the S&P 500 — Microsoft MSFT, Apple AAPL, Nvidia NVDA, Alphabet GOOGL, and Amazon AMZN — make up 29% of the entire market capitalization of the S&P 500 and have produced almost all of the recent market gains. This is the highest concentration in history, surpassing 1965 when stocks like AT&T T, Texaco, IBM IBM, and General Motors GM dominated the indexes. As recently as 2016, the top five names in the S&P 500 comprised less than 12% of the market capitalization.
This narrowness has been going on for a while and is driving many active investors crazy. Anyone with a diversified portfolio is lagging behind the index, and small-cap investors have had a sea of misery for years. The media seems oblivious to what is really going on in the market, which only makes it worse for investors who don’t own the indexes or a small group of big caps.
This is illogical and unsustainable, but what will it take for things to shift?
Investors not only don’t care about the stretched valuation of big-cap technology but view the relative strength as an indication of safety. Why wouldn’t you buy Apple AAPL with a price-to-earnings of 35 and single-digit growth when it is doing much better than smaller stocks?
The market will most likely see a significant shift in character when concern about economic slowing takes hold. There have been signs of a cooling labor market and an oversupply of homes for sale in many parts of the market, but there is still great optimism about corporate earnings growth.
The upcoming earnings season will likely cause some reassessment of growth forecasts, primarily since expectations have grown so much for big-cap technology in recent months. Stocks like Apple have risen sharply on artificial intelligence hopes, but actual earnings estimates have declined slightly and do not reflect the optimism.
Fed Chair Jerome Powell is beginning two days of testimony in front of the Senate on Tuesday, the consumer price index and producer price index reports will be issued later this week, and banks kick off earnings season on Friday. Markets currently anticipate two rate cuts this year, with a 70% chance of the first cut at the Fed meeting in September.
The combination of the Fed, interest rate cuts, economic slowing, and corporate earnings all can shift the market action. Many pundits forecast that a correction is about to hit, but it will likely start with an intraday reversal and a weak close on no apparent news.
This is a very challenging market due in large part to the way that media reports misrepresent what is really going on. Stay vigilant and be ready to act as price action shifts.
At the time of publication, DePorre had no position in any security mentioned.
