On the surface, the first five months of 2023 have been kind to equity investors as highlighted by a 9.26% gain by the S&P 500. The Nasdaq-100 Index (NDX) is truly impressive, outpacing the S&P 500 by a margin of more than 3-to-1.
A 30.69% year-to-date surge by the Invesco QQQ (NASDAQ: QQQ) – a growth/tech-heavy exchange traded fund tracking NDX, is obviously great for investors holding that fund or the stocks driving its jaw-dropping ascent.
Speaking of those stocks, as recently noted by Bank of America strategist Michael Hartnett, just seven names account for 84% (as of May 30) of NDX’s upside this year. They are as follows: Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).
In order, Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet, and Tesla are QQQ’s top seven holdings, combining for north of 53% of the fund’s weight. Alright so QQQ is home to just 101 stocks. It’s bound to be somewhat concentrated some advisors are apt to say. Well, the “diversification” picture isn’t much more impressive with the S&P 500 and the related ETFs and index funds.
In order, Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta and Tesla represent eight of that index’s top 10 holdings, combining for over a quarter of its weight.
Not Necessarily Bad, But Not Necessarily Encouraging, Either
Experienced advisors have seen the “bad breadth” movie before. Over the years, there have been numerous instances in which market observers have warned of narrow leadership in up-trending markets.
In some cases, that narrow leadership continued for extended periods, lifting broader benchmarks along the way. Other times, it fell apart, taking the market along for the bearish ride. Time will tell what happens what the current instance, but the fact is most stocks aren’t doing much of anything this year and many are actually in the read.
“One of the discomforting (and widely advertised) aspects of the market's advance this year has been the concentration of gains up the cap spectrum. Leadership among the mega-cap names—and the sectors in which they are housed (Information Technology, Consumer Discretionary, and Communication Services)—has strengthened while the ‘average stock’ hasn't moved much at all,” according to Charles Schwab research.
Also confounding advisors, analyst and market pundits alike is that smaller stocks – both mid- and small-caps – are floundering this year as mega-cap growth names surge. Again, time will tell that means, but it is potentially concerning.
“The underperformance down the cap spectrum is worrisome for a couple reasons. First, back in 2021, small caps and the ‘average stock’ were under a lot more pressure than the headline indexes showed,” adds Schwab. “A series of rolling corrections and bear markets under the surface ultimately preceded what turned out to be a full-blown bear in 2022. Second, with the economy now fully reopened, the absence of any strong performance from key cyclical segments of the market (i.e., small caps) would be worrisome.”
Top-Heavy Again
Indeed, supposedly “broad” equity indexes are against top-heavy, indicating advisors are right to ponder the veracity of this year’s rally. After all, the S&P 500 is flirting with a double-digit year-to-date in the face of negative contributions from the healthcare and financial services sectors. All those sectors do is combine for 26% of the index’s weight.
Other details bode ominously in terms of breadth. Notably, the technicals for many ordinary stocks are currently unattractive.
“Finally, another sign of the market's weak breadth is that only 12% of S&P 500 stocks are outperforming the overall index on a 60-day trailing basis,” concludes Schwab. “That’s an all-time low going back to 1993 (and notably, lower than it was in March 2000 at the peak of the tech bubble).”
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