Strength in megacap stocks masks broader U.S. market woes

Lewis Krauskopf

People are using an antiquated tactic to deal with the current upheaval in commodity prices: purchasing shares of the sizable U.S. companies that have been driving businesses higher for years. NEW YORK( Reuters)

Since March 8, when issues at Silicon Valley Bank sparked concerns about the banking system, shares of the top five companies by market value — Apple, Microsoft, Alphabet, Amazon, and Nvidia — have increased by between 4.5 % and 12 %. The S & P 500 has decreased by 0.5 % during that time.

Good balance sheets, durable profit margins, and business models that are anticipated to perform better in the event of a recession are what Megagaps are drawing bets for, according to investors. In 2023, U.S. bond yields are expected to rise again after rising next summer, punishing growth stocks.

However, their power was had flaws. Because of megacaps’ expanding market capitalization, indexes like the S & P 500 are being driven more and more by a smaller group of stocks. If conditions change and investors quickly leave big tech and growing names, that may encourage volatility in larger markets.

According to Keith Lerner, co-chief investment officer at Truist Advisory Services, which overestimates the tech business,” people believe that automation business are in a better position to get through an ambiguous period of time.” Meanwhile,” because everyone is in the same area, you may hear a sharp reversal out of nowhere when you have crowding.”

Megacaps conceal failing in other areas as well. Market breadth measurements have become more negative, and since March, the equal-weighted S & P 500, a proxy for the average stock in the benchmark index, has fallen by more than 5 %.

Following the demise of Silicon Valley Bank and Signature Bank earlier this month, people are anticipating further bank business volatility last week as a result of sharp declines in shares of Western financial giants Deutsche Bank, UBS, and other institutions. Markets may also be influenced by ongoing U.S. data on inflation and consumer confidence.

GRAPHIC: At https:// www.reuters.com / graphics / USA-STOCKS / WEEKAHEAD / akveqejezvr / chart.png, large stocks outperformed the market.

Following the financial crisis, Megacaps dominated the U.S. markets and sparked Wall Street’s explosive recovery following the downturn in early 2020 brought on by the coronavirus pandemic. However, they fell next year as a result of the Federal Reserve raising interest rates to combat 40-year-high prices.

As worries about the banking system increased and Apple and Microsoft’s combined weight in the S & P 500 recently topped 13 %, their rebound this year accelerated. According to Todd Sohn, professional planner at Strategas, that was the highest price for any of the index’s base two shares in more than 30 year.

At the end of 2022, the weight of the top five S & P 500 companies was 18.8 %, but now it is 21.7 %.

GRAPHIC: The weight of Megacap stocks in the S & P 500 is expressed as follows: https:// fingfx.thomsonreuters.com: paste % 20image % 201679681379839.png

Some indicators of width, which technical experts view as measures of narrow market wellness, have reportedly darkened as megacaps have recovered.

According to Willie Delwiche, an investment planner at Hi Mount Research, the number of different 52-week highs on the New York Stock Exchange and Nasdaq was on track to dominate new highs for three consecutive weeks, a reversal after new highers had nearly topped new lowers every week to begin 2023.

Additionally, Delwiche’s tracking of industry groups above their 10-week moving averages has decreased from 87 % in early February to 7 % over the past week.

Delwiche stated that” after some encouraging signs earlier this year, it’s proof that the design of weakness beneath the surface that we saw last year is re-emerging.” If the stocks are to support the following foot higher, we need to see greater participation.

If banking concerns ease and investors buy struggling financially private stocks, megacaps’ performance may suffer. Since March 8, the S & P 500 energy sector has lost 7.5 %, while the industrials sector lost 5 %.

Technology and growth stocks may be put under pressure by a rise in U.S. bond yields. Meanwhile, it is anticipated that tech sector earnings growth will trail the overall S & P 500 in 2023.

However, some people are optimistic about megacap futures.

Thomas Martin, older portfolio manager at GLOBALT Investments and a big fan of megacaps, said that despite last year’s competition swoon,” our discrimination has been that we think we are still in … an upward direction.”

That likely means” the big – cap growth stocks will be the ones who lead from here ,” he continued.

( Editing by Ira Iosebashvili and David Gregorio, reporting by Lewis Krauskopf )

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