Stuck in a Trading Range, For Now.
Stocks continue to tread water as debt ceiling fears and fresh concerns about the state of the economy are keeping this market from breaking through resistance. The University of Michigan consumer sentiment index fell to 57.7 in May from 63.5 in April. Chief Economist Jeffrey Roach at LPL Financial believes that slowing spending on concerns of weakness in banking, jobs and may finally bring inflation back on track. The markets didn’t really like the news. (Source: Bloomberg)
Over in bonds, the yield on the 10-year Treasury note rose and put a cap on the tech stock rally. The front end of the curve remains elevated due to the debt ceiling debate and the fears of a default. We still need more participation outside of major technology.
The 2023 rally by the S&P 500 index is being led by Mega cap tech-related stocks. Those stocks now have weightings that are at historically high levels. The top 10 stocks hold a 29% weight in the index and are responsible for around 70% of year-to-date performance. For one, over the last 40 years, the weight of the top 10 stocks in the S&P 500 has rarely been below 20%. Secondly, unlike previous concentration highs (like during the dot-com bubble of the late 1990s), the current group of tech giants produces real earnings and strong cash flow. In fact, they are by far the most profitable businesses in the world. And what does a high level of concentration say about the future? Apparently, not much. Concentration analysis has proven not to be a useful indicator for forward returns.
In a vacuum, more stocks joining a rally is healthier, but a top-heavy market alone doesn’t increase the risk of near-term underperformance.
The reality is that concentrated leadership is probably going to be exacerbated by future technological trends in AI. In fact, it’s hard to imagine an index that’s weighted according to market capitalization, that doesn’t see the Mega cap techs stocks like AAPL/AMZN/GOOGL/NVDA/META getting bigger and bigger. This is how the S&P 500 works. Remember, in a market-cap weighted index like the S&P 500, each component is weighted according to its market capitalization. This means the structure is dynamic, and basically rewards recent winners, punishing recent losers, and ultimately chases the market’s leading momentum stocks via its market cap weighting process.
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