Just as traditionalist baseball fans complain that winning teams rely too much on a few big home run hitters, people on Wall Street say the stock market’s recent resilience is It owes a lot to a small group of big growth stocks and complains that it hides broad weaknesses. The Vanguard MegaCap Growth Basket has him up 21% so far this year, while the Russell 1000 has him slightly positive in weight heading into 2023. Highest price to date. But since that day, Microsoft, Apple, Nvidia, and Meta Platforms have added a combined market value of about $800 billion. So the other 496 stocks combined lost a little more value than that. .SPX YTD Mountain S & P 500 YTD The same dynamic is happening at the sector level. JP Morgan has outperformed the equally-weighted S&P 500 financials by 13% this year. In energy, ExxonMobil has a 14% advantage over the egalitarian version of the energy sector. Nvidia is up 90% in four months, and the semiconductor group with the same weight is just 6.5%. This winner-takes-most behavior is characteristic of the broader defensive shift underway in the market, where capital is less abundant, more expensive, and the economy a little less easy to attack when it’s not. We favor companies with balance sheets and dominant franchises. Growing up. So it’s a reasonable turnaround, at least given current economic preconceptions. But does this change in the nature of the market mean that the market is particularly vulnerable as the critics of “bad widths” claim? What is the real meaning of “bad widths”? There is a reason why rallies with broad upside participation by the majority of stocks are seen as more bullish. In general, these suggest a backdrop of better demand for equities, healthier risk appetite and overarching fundamental growth. Just as in baseball more balanced lineups tend to succeed more consistently over long seasons. , does not imply a single clear message regarding future returns. Below, we compare the performance of ETFs, including the Russell Top 50 Index (the top 50 stocks by market capitalization), to the Russell 2000 of small caps, at an extreme position that appears to be historic and volatile. His early February last year, when this ratio similarly surged, was before entering a severe downturn near the start of the 2022 bear market. However, the three previous peaks noted occurred near the end of a serious correction, giving way to a widespread rally of relief. The details are currently not matched exactly. At the time, both large and small caps were down, with much less heavyweight stocks down. Still, the tape is a reminder that it’s really flowing, with the potential to veer between limited, selective leadership and all-encompassing relief rallies. Jeff DeGraaf, chairman of Renaissance Macro, said Friday that the potential breakdown and generally weaker breadth of small caps is not a healthy trait in itself, but that such dynamics could change fairly quickly. He also noted that major international stock indices are trending upwards. “The range is bad, but the S&P 500 is actually one of the weakest indices in the G7,” he says. [domestic] That’s right, the Nasdaq’s reliance on giants (including Chipotle, Starbucks, some casinos, processed food makers, and home builders) could get tough if it stretches too much and then retreats sharply. A market to ignore? But this split market tapes somehow ignores the shadow of recession risk as the S&P 500 hovers near multi-month highs and fetches 18x future earnings projections It’s also an apt refutation of another common complaint that Acyclical growth giants, whose stocks are holding their benchmarks weaker than the leading indices, have seen public names digest uncertain fundamental trends, reset valuations, and frustrate shareholders. I mean, the equally weighted S&P 500 is approaching 15x earnings. Megacap favorite’s dominance is probably a bigger concern if investors get comfortable about the market outlook will be Sentiment gauge numbers and anecdotal chatter about recent behavior strongly suggest this isn’t happening. Most investors are rightly noticing the failure of the S&P 500 to crash past his long-standing peak around 4200, even as FAANMG shares are rising. Persistent weakness in bank stocks. and a sense that the economy has not given due consideration to weakening growth potential and a potential credit crunch. If the crowd was strolling down the sunny side of the street, we might hear more about the S&P 500 being flat for the past two years and he’s six and a half months into a new bear market. yeah. Earnings are well above pre-pandemic levels and the Federal Reserve (Fed) is ending its tightening campaign sooner than feared thanks to an unprecedented regional banking crisis. Although this is primarily a measure of how much earnings expectations have fallen before the reporting season begins, about 80% of the S&P 500 companies beat their earnings forecasts in the first quarter, a year-over-year total decline. The profit decline was 3.7% compared to the first quarter. We expect a decline of 6.7%. More surprisingly, according to FactSet, the consensus forecast for the full year 2023 and the consensus forecast for the full year 2024 are actually up slightly. While this by itself is not a reliable sign of weaker earnings, it does reflect the company’s confidence in the second half of the year. Note that even when companies generally outperform expectations and confirm full-year guidance, individual stocks haven’t traded particularly well. The Microsoft and Meta Monster gains after reporting results are the exceptions for this quarter. This captures a big-picture debate that will likely not be resolved in the coming months. Are the leading indicators of near-term recession (the US Treasury yield curve, the continued rise in unemployment claims, his Fed’s survey of businesses in various regions) credible in this ‘abnormal cycle’? Or will sustained consumer income growth, easing excess savings, lower inflation and rebounding housing demand keep the economy in a comfortable range of nominal GDP growth? And in the latter scenario? looks plausible for some time, will the Federal Reserve tighten further to weaken it?
