NEW YORK (Reuters) – The US S&P 500 benchmark is now positive for the year, yet most of its components have passed the rebound.
FILE PHOTO: Traders wearing masks work, the first day of in-person trading since closing during the outbreak of coronavirus disease (COVID-19) on the floor of the New York Stock Exchange (NYSE) in New York, USA, May 26, 2020. REUTERS / Brendan McDermid / File Photo
After a sharp rise in months, the index is up 0.8% on the year and at its highest level since February 21.
However, for every stock that has moved up in the S&P 500 this year, 1.7 has declined, according to Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
This is in part because investors have gravitated toward a small group of technology-related stocks that they believe have the best chance of generating steady profit in a climate fraught with uncertainty about the coronavirus pandemic and its economic consequences.
The S&P 500’s five most valuable companies – Apple Inc, Microsoft Corp, Amazon.com Inc, Alphabet Inc and Facebook Inc – account for about 23% of the index’s market capitalization, the highest level on record, according to Goldman Sachs.
“It’s hard to imagine the index going up if it loses that leadership,” said Robert Phipps, director of Per Stirling in Austin, Texas. “Most of the market doesn’t really participate here.”
The technology-related sectors to which those shares belong have outperformed other sectors by significant margins this year. The technology index, which includes Apple and Microsoft, is up about 18%, while the discretionary consumer index, which includes Amazon, is up 15%. The communication services index, which includes Alphabet and Facebook, has increased almost 6%.
Only one other sector, health care, has had annual profits.
While U.S. equity valuations are at their highest level since the dot-com boom, the flight to large-cap tech-related companies reflects caution rather than euphoria, said Quincy Krosby, chief strategist. Prudential Financial Market Research in Newark, NJ.
In addition, the top five companies in the S&P 500 have a higher share of index earnings and are trading at a lower multiple than the top five companies in 2000, wrote Jonathan Golub, chief U.S. equity strategist at Credit Suisse, Tuesday in a research note. .
Given their relatively strong balance sheets and more stable revenue streams, many investors believe that large-cap and technology-related companies are better positioned to withstand the economic pressures resulting from the new coronavirus pandemic.
“These are strong companies,” said Krosby. “You are not seeing a change to technology that is experimental, that has no benefit.”
Meanwhile, the underperformance of the small-cap Russell 2000 index and stocks in cyclical sectors like the financial and industrial sectors suggest a still tentative outlook for the US economic recovery, Krosby said.
These actions have outperformed for short periods in recent months, but technology-related actions have quickly taken the lead.
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