The Stock Market’s Rally Is Being Driven by a Few Big Stocks
The S&P 500 is up 7% this year, but the average stock is up barely 1%. Narrow rallies can be less sustainable.
The first three months of trading in 2023 have been a tale of the haves and the have-nots.
The S&P 500 is up 7% this year, but the average stock is up barely 1%. Narrow leadership tends to signify a shakier rally than one with a broader group of stocks participating. The good news for investors is that things appear to be improving after a tough March.
The market capitalization-weighted index’s overall rise is thanks to a handful of megacap companies at the very top: The 20 largest companies in the S&P 500 have added nearly $2 trillion in market cap this year, versus $170 billion for the remaining 480 stocks, notes Torsten Slok, chief economist at Apollo Global Management.
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That’s a combination of both big starting market values and big increases in price. Apple (ticker: AAPL) has climbed 26% this year, to a market-cap of $2.6 trillion. That has contributed 1.6% to the S&P 500 alone, according to Goldman Sachs data. Microsoft’s (MSFT) 19% rise and Nvidia’s (NVDA) 83% surge have each added more than 1%. In 2022, the same names dragged the S&P 500 down.
Those megacap stocks’ influences on the index dwarf the impact of the biggest losers this year. Charles Schwab (SCHW), down 37%, has subtracted just 0.15% from the S&P 500. First Republic Bank (FRC) is down 88% in 2023—weighing on the index by just 0.08%. Pfizer (PFE), down 20%, has cost the S&P 500 just 0.18% this year.
“Our view is that megacap tech has been a beneficiary of the selling in other sectors, but ultimately once that rotation was done, the indexes would be quite vulnerable,” wrote Jonathan Krinsky, chief market technician at BTIG, on Wednesday. “This dispersion is something that often occurs in the latter innings of market rallies.”
There’s less room for error—should the winds shift and Apple, Microsoft, and a handful of other stocks stumble, the S&P 500 is vulnerable too. It’s also a tougher environment for stock pickers, with fewer winners to choose from.
It isn’t all about individual stocks. The sharp year-to-date divide has to do with macro forces. Contributing to the S&P 500’s rise this year has been a sharp decline in bond yields, particularly over the past month of banking turmoil as investors lowered their expectations for additional Federal Reserve interest rate hikes. That has been felt most in growth-oriented stocks and sectors: the Nasdaq Composite index has added 15% in 2023 and the S&P 500 technology sector has gained 19%.
Meanwhile, banking-related and economically exposed sectors have fallen. It’s a recipe for a large divergence in sector performance that has only recently begun to narrow. About 47% of S&P 500 technology stocks were trading above their 50-day moving averages as of Wednesday’s close, versus 61% on Tuesday and compared with 43% of stocks in the overall index, according to data from Bespoke Investment Group. It isn’t just growth that has been up recently—defensive, bond-proxy sectors have also enjoyed a rally thanks to falling bond yields. Some 93% of S&P 500 utilities stocks and 68% of consumer staples were above their 50-day moving averages Wednesday.
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That compares with a brutal stretch until recently for shares of banks, credit-dependent real estate stocks, and cyclically sensitive sectors. Only 7% of REITs, 19% of financials, 22% of industrials, and 24% of materials stocks were above their 50-day moving averages at Wednesday’s close.
Still, that’s a broad improvement from two weeks ago, when just 18% of S&P 500 stocks were above their 50-day moving averages. Market breadth appears to have bottomed in mid-March, then improved late in the month and so far in April.
Energy stocks have joined the rally this week, following the announcement of an unexpected production cut by OPEC and its allies over the weekend. The S&P 500 energy sector is up 4% in three days, and the percentage of stocks in the sector above their 50-day moving averages has jumped to 74%, from 13%, according to Bespoke.
The 2023 rally remains anchored by the biggest stocks at the top of the market—a phenomenon that can’t last forever. Things are moving in the right direction, but investors will need to continue to see broader participation to gain greater confidence in the rally.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com