The number of new 52-week lows on the NYSE and Nasdaq has been on the rise, outpacing new highs for the third week in a row, while the percentage of industry groups above their 10-week moving averages has significantly dropped. This weakness beneath the surface is a reversal from the trend seen at the beginning of 2023, which saw new highs topping new lows almost every week. Investment strategists are worried about this trend re-emerging and stress the need for better participation for the indexes to sustain the next leg higher. Meanwhile, the performance of megacap stocks could be impacted if banking worries ease, and investors begin to invest in economically sensitive stocks that have been struggling. The energy sector of the S&P 500 is down 7.5% since March 8, while the industrials sector is off 5%. Despite this, some investors remain bullish on megacap stocks, as they believe that they will lead the way forward.
Strength in Megacap Stocks Masks Broader U.S. Market Woes
Investors are turning to an age-old strategy to navigate the ongoing asset price turbulence – investing in the top U.S. companies that have driven markets higher for years. The top five companies by market value, including Apple, Microsoft, Alphabet, Amazon, and Nvidia, have experienced gains ranging from 4.5% to 12% since March 8. This comes amidst concerns over the banking system, which were triggered by troubles at Silicon Valley Bank. However, while megacaps have become increasingly popular due to their strong balance sheets, robust profit margins, and expected ability to withstand recession, their strength could have some drawbacks.
The growing market capitalization of these companies means that indexes such as the S&P 500 are becoming increasingly dependent on a smaller cluster of stocks. This dependence could lead to increased market volatility if investors exit big tech and growth names quickly due to a change in circumstances. According to Keith Lerner, co-chief investment officer at Truist Advisory Services, “when you have crowding you could see a sharp reversal out of nowhere because everyone is in the same area.”
Investors are also becoming increasingly aware that the strength of megacap stocks is masking weakness elsewhere in the market. Measures of market breadth have turned more negative, and the equal-weighted S&P 500, which is a proxy for the average stock in the benchmark index, has fallen over 5% since March. Deutsche Bank and UBS, two European banking giants, experienced sharp declines in their shares following the collapse of Silicon Valley Bank and Signature Bank earlier this month. As such, investors are bracing themselves for further banking sector volatility in the coming weeks.
Megacaps have been leading the U.S. market for a decade since the financial crisis and spearheaded Wall Street’s recovery following the selloff in early 2020 caused by the pandemic. However, they tumbled last year when the Federal Reserve raised interest rates to fight against 40-year high inflation. Their rebound this year has accelerated following the spike in concerns over the banking system, with the combined weight of Apple and Microsoft in the S&P 500 recently topping 13%. This is the highest for any top two stocks in the index in over 30 years, according to Todd Sohn, a technical strategist at Strategas.
As megacaps continue to rally, some indicators of breadth, which are viewed as gauges of broad market health by technical analysts, have been turning negative. This is something that investors will need to keep in mind as they navigate the current tumultuous market conditions.
Weakness Beneath the Surface: New Lows Outpace New Highs for Three Straight Weeks
The number of new 52-week lows on the NYSE and Nasdaq has been on the rise, outpacing new highs for the third week in a row. This is a reversal from the trend seen at the beginning of 2023, where new highs had topped new lows almost every week, according to Willie Delwiche, an investment strategist at Hi Mount Research. Furthermore, the percentage of industry groups tracked by Delwiche above their 10-week moving averages has dropped significantly, going from 87% in early February to 7% in the latest week.
Delwiche suggests that this is evidence that the weakness seen last year is re-emerging, and better participation is needed for the indexes to sustain the next leg higher. The performance of megacap stocks could be impacted if banking worries ease and investors begin to invest in economically sensitive stocks that have been struggling. The energy sector of the S&P 500 is down 7.5% since March 8, while the industrials sector is off 5%.
A rebound in U.S. bond yields could further pressure tech and growth stocks, especially since earnings growth in the tech sector is expected to trail the overall S&P 500 in 2023. Despite this, some investors remain bullish on megacap stocks, as they believe that they will lead the way forward.
Thomas Martin, Senior Portfolio Manager at GLOBALT Investments, states that their bias is that the market is still in an upward trend, despite last year’s market swoon. In turn, he predicts that big-cap growth stocks will be the ones leading from here.
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