Topline
Big-tech stocks rallied after earnings this week and drove big gains for major indexes, but the number of stocks actually outperforming the broader market has slipped to levels unseen in decades—and in some cases, ever—pushing some experts to warn the strength may be a telltale sign of economic weakness.
Key Facts
Buoyed by blockbuster earnings releases from Microsoft, Meta and Google-parent Alphabet, the S&P 500 and tech-heavy Nasdaq have jumped about 2% and 3% since Tuesday, respectively—tacking on to a rally that’s seen the Nasdaq surge 17% this year.
Despite the gains, however, JPMorgan analysts led by Dubravko Lakos-Bujas warned clients in a note that market breadth—as measured by the percentage of stocks in the S&P that have outperformed the broader index—is the “weakest ever” by some measures.
For one, the market value of the S&P’s two largest stocks, Apple and Microsoft, commands some 14% of the index’s value as a whole—the most ever in history; meanwhile, the 10 largest stocks are responsible for nearly 90% of the S&P’s return this year—also the most ever.
Such “extreme concentration” in stocks supports a “bearish outcome for the market” because it has typically preceded economic slowdowns or recessions in the past, Dubravko Lakos-Bujas wrote, adding that the current rally, in particular, seems fueled by optimism that should soon fade about the end of the Federal Reserve’s interest rate hikes.
To make matters worse, JPMorgan notes the current degree of crowding implies “the risk of recession is far from priced in” even though fears have re-emerged following the collapse of Silvergate, Silicon Valley Bank and Signature Bank last month.
Morgan Stanley’s Michael Wilson is no more optimistic, saying on Tuesday he’s not convinced the bear market is over unless the performance of small-cap and regional bank stocks—both of which have underperformed while big tech rallies—improves.
Crucial Quote
“We are challenged to find a period in history during which these indices have underperformed to such a degree while a new bull market was beginning,” says Wilson.
Key Background
After slipping into a bear market late last year, stocks have largely rallied over the past four months. Much of the bullishness has been fueled by hopes the Fed may soon cut interest rates (after more than a year of hiking them) to help ease uncertainty in the financial sector. “Big tech has been outperforming this year as Wall Street expects rate cuts to provide relief,” explains Oanda analyst Edward Moya—before expressing some doubts: “For the rally to continue we need to see a few hundred basis points in rate cuts, which is not necessarily going to happen if the Fed chooses inflation over financial stability over the next year.”
What To Watch For
The Fed’s next policy meeting concludes next Wednesday. The futures market implies just a 14% chance the central bank will keep rates the same and an 86% chance it will again raise rates by 25 basis points, according to the CME FedWatch Tool. Over the past few weeks, the odds have only grown in favor of another rate hike. Annual inflation fell for a ninth-straight month in March, but consumer prices still rose by 5% on a yearly basis—well above the Fed’s 2% target.
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