Uncertain investors seek comfort in tech heavyweights
Markets have remained remarkably resilient this year, with each period of weakness followed by investors buying the dip and pumping up the rally. Inflation worries, global growth volatility and Fed policy uncertainty dominates the current news cycle. More recently, the risk from the coronavirus Delta variant and the prospect for additional lockdowns have spooked the stock market. Despite that, the S&P 500® Index sits near a record high and is on pace for its sixth-straight monthly gain in July.
However, the latest run-up has masked a deterioration in market breadth. While the market-cap-weighted S&P 500 sits at a record, the equal-weighted S&P 500 peaked on May 10th and since then has underperformed the cap-weighted index by 5%. A similar trend exists in small caps; the Russell 2000 Index peaked in March and has since declined by 7% and underperformed the S&P 500 by 17%. The return of investors to the mega-cap tech stocks has powered this shift. The big five technology-related companies—Apple, Microsoft, Amazon, Alphabet (Google), and Facebook—have outperformed the S&P 500 by 9% since early June. These companies are also the largest stocks in the S&P 500, so they are also driving the performance of the broad equity market.
Since the financial crisis, investors have returned to the “comfort blanket” of large tech stocks in periods of uncertainty. This is understandable, given that these firms have consistently beat expectations, have multiple levers for growth and enjoy strong balance sheets and cash flow generation. Any periods of underperformance, like the one between September 2020 and June 2021 when cyclical stocks came into favor, are followed by a quick rebound. Over the past decade, the S&P 500 has returned 226%, which is impressive until you consider the 962% cumulative return of these mega-cap tech stocks. While much of these gains are justified by earnings, there is worry that narrow leadership hides underlying stress in the market and is not sustainable. More seasoned market observers would like to see a broadening of leadership beyond this small band of big winners.
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