The divergence in the S&P … a flight to tech safety … Luke Lango’s Core Portfolio is crushing comparables … why it could be just the beginning
How widespread is this recent market rally?Specifically, are we seeing strength across the entire market, or are the gains more localized, providing the appearance of robust strength though the reality is different?The answer is important. After all, if the gains are widespread, great – a rising tide lifts all ships.However, if the gains are narrower, then you might choose to wait before putting money to work, or perhaps focus only on the corners of the market that are outperforming.
To begin answering this question, let’s evaluate the S&P 500 Index and the S&P 500 Equal Weight Index
To make sure we’re all on the same page, the S&P 500 Index is comprised of a shade more than 500 of the largest companies in the United States (503 as of March).However, all of these companies don’t get equal representation in the index. That’s because the S&P is “weight-averaged.” In other words, the larger the company, the more “representation” it has in the index. Given this, when we look at the S&P, we’re not viewing an accurate depiction of how its average stock is performing.To illustrate, if each company in the S&P 500 received an equal weight, that would mean a standard allocation of roughly 0.20%. Instead, the largest company in the S&P 500 – Apple – enjoys a 7.10% weighting – 35X-larger than “average.”That’s followed by Microsoft at 6.2%, and Amazon at 2.6%.It turns out, the top 10 holdings in the S&P 500 command a whopping 27.2% weighting of the entire index. This means that these mega-cap stocks (mostly tech) have an outsized influence on the performance of the S&P 500.So, if we’re trying to get a sense of how all the S&P stocks are doing, the S&P’s headline number isn’t the best way to accomplish that.Instead, we’d look at a different index – the S&P 500 Equal Weight Index. As the name implies, this gives us the equal representation we’re looking for.Below, let’s look at the relative performance of S&P 500 compared with S&P Equal Weight here in 2023. With the S&P in black and the S&P Equal Weight in green, you’re going to see that they moved in lock-step through early-March, but then there was a notable divergence.
On the year, while the S&P is up nearly 8%, the S&P Equal Weight is only up nearly 3%.For another way to assess the uniformity of this rally, we can evaluate the number of “new highs” in the S&P 500.If we have a uniform rally across all sectors, we’d be more likely to see the number of new highs growing at the same time the S&P climbs.That’s not what’s been happening. As you can see below, the number of new highs has been dropping since peaking in early-February.
What’s happening here?
Well, early-March is when we experienced the banking collapses. The resulting desire for “safety,” coupled with a shifting expectation about lower interest rates in the future because of economic weakness, made big tech appear rather attractive.And given big tech’s heavy weighting in the various indexes, this made the indexes appear to surge, even though those gains aren’t matched by the rest of the index constituents.Here’s MarketWatch:
Megacap technology stocks like Amazon.com Inc., Microsoft Corp. and Apple Inc. have outperformed the broader market by the widest margin in years following the collapse of Silicon Valley Bank and two other U.S. lenders…One analyst who compared the performance of megacap tech names against the average S&P 500 stock, helping to underscore the magnitude of the so-called “FANG” stocks’ outperformance…“This flight to mega caps is part of a larger escape by investors towards perceived ‘safety,’” Atanasiu said in a note emailed to MarketWatch.The biggest tech stocks have outperformed value-focused names, like the constituents of the Dow Jones Industrial Average, by an even wider margin, according to FactSet data.
Our hypergrowth expert Luke Lango has been urging investors to focus on top-tier tech stocks for months
While Luke believes certain FAANG stocks could have more gains to come, he’s far more bullish on smaller, more explosive tech plays.To understand why, let’s look at a range of returns so far in 2023.
The MarketWatch article we just quoted ended by referencing the Dow Jones. The Dow – with little exposure to technology – is up 2.4% on the year as I write Monday morning.Meanwhile, the S&P 500, with its larger exposure to tech, is up more than 7.8%.The tech-heavy Nasdaq that is heavily influenced by the FAANG stocks along with other mega-cap tech leaders like Nvidia, has climbed 15.8%.Finally, Luke’s Core Portfolio of best-of-breed tech stocks in Innovation Investor has surged nearly 25% here in 2023 (as of late last week).Simply put, this is an uneven market.But if Luke is right, this is just the beginning of tech’s outperformance. As he recently wrote in his Innovation Investor Daily Notes:
History is simply repeating right now. Therefore, we continue to emphasize a “buy-the-dip” approach to growth/tech stocks as we go into summer.The current grind higher in tech/growth stocks will turn into a surge higher.
What Luke sees coming from the Fed, and how that will impact the market and top-tier technology stocks
Luke grounds his market approach in data. And the data he believes will drive this market – and tech – throughout 2023 is inflation.Let’s return to his Innovation Investor Daily Notes:
We think the next leg higher of the 2023 stock market rebound has begun. The data clearly shows that inflation is crashing about as quickly as it could be right now. Moreover, we’re getting awfully close to the Fed’s 2% target. Continuing at their current pace of disinflation, consumer price inflation will hit 2% by June, and producer price inflation will drop below 2% next month. Inflation is dying.
Luke then pivots toward the labor market, pointing out the recent spike in jobless claims as well as some state-level data showing weakness, concluding with:
With inflation dying and labor conditions weakening, the stage is set for the Fed to pause its rate-hike campaign by June.Fed pauses systematically spark stock market rallies. And we don’t think this time will be different.
Another piece of data from Friday is supportive of a Fed pause
On Friday, we learned that retail sales dropped steeply in March. Here’s more from CNBC:
Americans cut their spending at retail stores and restaurants in March for the second straight month, a sign consumers are becoming more cautious after a burst of spending in January.Retail sales dropped 1% in March from February, a sharper decline than the 0.2% fall in the previous month. Lower sales of autos, electronics, and at-home and garden stores drove the decline…The decline in sales adds to other recent evidence that the economy is cooling as consumers grapple with higher interest rates and the impact of a year-long bout of elevated inflation.
It’s just one more piece of data giving the Fed firepower to slow down its aggressive rate policy.Back to Luke:
Inflation is crashing. The labor market is cracking. The Fed is considering a pause. Next up? The Fed actually pauses. The economy restabilizes. Stocks keep pushing higher.
By the way, I should point out that at the beginning of the year, Luke and his Innovation Investor team set a target to score 100% returns in their Core Portfolio in 2023.Given their outperformance so far this year, that goal remains very attainable. Here’s Luke:
…Here in April, we firmly believe that we will hit and potentially even exceed that target.
To join Luke in Innovation Investor and access the tech stocks he believes will drive this 100% return, click here.In any case, there’s no denying that this market is imbalanced, with tech racking up most gains. But if Luke’s right, this trend will only snowball.Have a good evening,
Jeff Remsburg
