It really is a tale of two markets right now. Mega-cap tech stocks such as Nvidia, now valued at more than $1 trillion, have been soaring, but everyone else? Not so much. The S&P 500 is up 9 per cent this year, but all of those gains are due to the performance of only seven technology stocks. Indeed, just three stocks account for 70 per cent of the index’s gains, notes Citi’s Stuart Kaiser.
The five largest S&P 500 stocks – Apple, Microsoft, Alphabet, Amazon, and Nvidia – have outperformed the index by some 30 percentage points this year.
In contrast, the equal-weighted version of the S&P 500, which dilutes the impact of mega-cap companies by allocating each component stock the same weight, is actually down 1 per cent.
The current performance divergence is extreme – Bloomberg data shows the equal-weight S&P 500 is losing out to its cap-weighted counterpart by a wider margin since at least 1990. In short, market breadth is “awful”, as Goldman Sachs put it last week. Although the S&P 500 hit new highs for the year last week, just 40 per cent of stocks were trading above their 200-day moving average, compared with 80 per cent in early February.
Even the tech-heavy Nasdaq 100 index is characterised by bad breadth. While the index has soared over the last month, Goldman notes just 44 per cent of its constituents are trading above their short-term 20-day average.
All rallies are driven by a select number of outperforming stocks, but the current advance really is a remarkably top-heavy affair.