By William Watts
Investors fear a pullback from market leaders will sink the S&P 500
Investors spent 2023 worrying about the sustainability of a stock market rally driven largely by a handful of mega-cap tech stocks. Those concerns remain as the S&P 500 has returned to record territory in the new year.
"With the usual set of mega-cap stock picks pacing their performance in early 2024, concentration risk concerns have once again received a lot of attention, and particularly what it could mean for stock market performance if these trends will reverse in the coming months," said Brian Belski, chief investment strategist at BMO Capital Markets, in a note.
It's a topic that comes up frequently in conversations with clients and seems to be what investors are most concerned about, he said.
The good news, according to Belski, is that investors may be overestimating the risk that a mega-cap reversal would pose to the bull market.
Instead, BMO analysis shows that the S&P 500 SPX has performed quite well following spikes in the relative performance of the 10 largest stocks. Belski highlighted the data below, which shows that the S&P 500 has averaged a return of 14.3% in the year following previous relative performance peaks since 1990.
S&P 500 subsequent 1-year performance after peak in Y/Y relative performance of 10 largest S&P 500 stocks Year Performance 1992 +12.4% 1998 +38.7% 2001 -22.6% 2009 +22.2% 2013 +17.9% 2019 +2.2% 2021 +29.2% Average +14.3% Source: BMO Capital Markets, FactSet
The only period in which the index posted losses came in 2001, after the collapse of the tech bubble, which Belski said is not a comparable period despite recent comments to the contrary.
The stocks of the so-called Magnificent Seven: Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL) (GOOG), Meta Platforms Inc. (META), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) and Tesla Inc. (TSLA), dominated stock market returns in 2023.
Read: AI Hype Around 'Magnificent 7' Stocks Latest Example of 'Great Market Hoax'
In 2024, leadership will be even more concentrated, with Microsoft, Meta, Amazon and Nvidia doing most of the heavy lifting, Adam Turnquist, chief technical strategist at LPL Financial, said in a Tuesday note (see chart below).
Belski acknowledged that it was "hard to deny the enormous influence that larger stocks could have on market performance given their heavy weighting in the index, especially if they start to struggle and that's what we think investors are most concerned about."
However, investors should keep in mind that the S&P 500 almost always sees a technical correction at some point during the second year of a bull market, Belski said. BMO maintains that the bull market began after the S&P 500's bear market low in October 2021.
So if high-flying mega-cap stocks start to struggle, causing broader market weakness, it won't be enough on its own to negate the bull market's prospects, he said.
Given that the S&P 500 has averaged a maximum decline of approximately 10% in the second year of bull markets, investors should "remain active and disciplined when it comes to their investment process rather than being passive or reactive to trends." short-term performance," he wrote. .
The S&P 500 and Dow Jones Industrial Average DJIA were on track to finish at all-time highs on Wednesday.
-William Watts
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02-07-24 1411ET
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