July 29, 2024
If you don’t own the select few high-flying mega technology stocks, your portfolio is probably underperforming the broader market.
I’m talking about NVIDIA Corporation (NVDA), Taiwan Semiconductor Manufacturing Company (TSM), Microsoft Corporation (MSFT), and other Wall Street AI darlings that are crushing the S&P 500. As of this writing, the S&P 500’s year-to-date return is about 16%, while NVDA, TSM, and MSFT have gained 164%, 71%, and 19%, respectively.
This may make you understandably envious. But before you sell underperforming stocks and jump into the tech heavyweights, know there may be a great market equalizer unfolding.
You’ve probably heard about weak market breadth lately. It’s when few stocks participate in a rally. Well, one popular measure of market breadth has recently fallen to 2008 levels.
Let’s examine a few different slices of the S&P 500 via proxy exchange-traded funds.
The Invesco S&P 500 Top 50 ETF (XLG), which tracks the top 50 stock in the S&P 500, has gained 22.3% this year, beating the full-index-tracking SPDR S&P 500 ETF Trust (SPY) return of 15.5%. Even more striking is when take the average return of every stock in the S&P 500 equally via the Invesco S&P 500 Equal Weight ETF (RSP) – it’s returned just 4.9% so far this year.
Market bears are ringing the warning bells.
One measure they cite is the SPY/RSP ratio, which is at roughly 30%, a level not seen since 2008.
There have been 80 trading days when the SPY/RSP ratio was this low (all in late 2008/early 2009). But history has shown that broad market rallies can follow low levels of breadth. Thus, today’s setup is quite like the tech bubble.
Besides having sky-high valuations, some tech companies seem to be bloated and inefficient. Google parent Alphabet Inc. (GOOGL) has 185,000 employees. Conversely, competitor Perplexity has just 55 employees and is a search industry player.
Elon Musk cut many X (formerly Twitter) employees and the company seems to work just fine. Maybe some tech stocks are ripe for some disruption.
All stocks and ETFs mentioned in this post are for illustrative purposes only and not a recommendation by Dan White and Associates.