Investment

S&P 10 or S&P 500?

by Pierre Mouton

S&P 10 or S&P 500?

This year, 10 tech stocks accounted for 100% of the S&P500’s performance. Should we be worried?

The US equity market is particularly polarised in the first half of 2023. In fact, the contribution of just 5 companies (Apple, Microsoft, Nvidia, Alphabet and Amazon) out of the 500 that make up the S&P 500 accounts for 77% of the index’s performance. Add Meta, Tesla, Broadcom, AMD and Salesforce and you get 100% of the performance of the world’s largest index. This means that 490 stocks will have been ‘worthless’ so far this year.

What these ten companies have in common is obvious: they all belong, in one way or another, to the technology sector or, more broadly, to the themes of digitalisation and artificial intelligence. While digitisation has been a major performance driver for almost 10 years now, the artificial intelligence craze has given it a considerable boost, notably with the increasingly widespread use of the famous ChatGPT.

PROGRESS IS MORE WIDESPREAD IN EUROPE

By way of comparison, the 10 biggest contributors to the performance of the Stoxx 600 in Europe account for only around a third of the index’s advance at this stage, and belong to sectors as diverse as luxury goods, pharmaceuticals, commodities, technology and consumer staples. This seems much healthier, even if part of the explanation for this eclecticism in Europe is to be found in the absence of information technology mega-caps on the Old Continent.

So is this narrowness of the US market (and of the global indices, which are largely made up of the aforementioned US stars) a bad omen that we should be worried about? Yes and no.

THE MARKET CANNOT DEPEND ON A SINGLE SECTOR

Yes, because, to paraphrase a military adage, defeat is certain if the generals advance and the troops do not follow. There is a clear risk here that the enthusiasm surrounding these great leaders will run out of steam, or that their valuations will simply become too demanding, leaving the market short of leadership and at the mercy of erratic fluctuations linked to interest rates, the economic climate or commodity prices. A single sector or theme cannot be the sole sustainable source of performance in indices as broad as the S&P 500 or the MSCI World.

A VERY DIFFERENT SITUATION FROM THE INTERNET BUBBLE

No, because stock market history shows us that this type of situation is nothing new: it has frequently happened in the past that a handful of stocks have taken the whole market with them, without the market subsequently collapsing. What’s more, the major leaders we’re talking about today are formidable profit and cash flow machines. The comparison with the dotcom bubble of 2000 is therefore inappropriate, since at that time the profitability of the best-performing companies was low, if not non-existent. Finally, the economic reality behind the themes of digitalisation and artificial intelligence is more than clear: the related investment cycles are gigantic and far from over.

In conclusion, we will need to keep a close eye on the behaviour of the ‘rest’ of the market over the coming weeks and months. If the underperformance of the laggards increases, we will have to be very careful, as the market would then find itself overly dependent, and therefore dangerous, on a small number of companies. If, on the other hand, participation in the performance of the indices becomes more widespread, then this would confirm the good health of the market and provide an excellent reason to be very optimistic about equity investment.

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.

© NS Partners Group

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