The “fear gauge” for the stock market is showing that things are looking good for the S&P 500. But below the surface, member stocks are becoming more and more independent.
Because of this, six-month implied correlation for S&P 500 SPX members dropped to its lowest level ever last week, according to data from Cboe Global Markets. This is because individual stocks in the index are moving in lockstep much less often than they used to.
The prices of stock options can show how investors think stocks will move in relation to each other over the next few months. This is called implied correlation. Will they go up and down together? Or will they move mostly without affecting each other?
Since the start of the bull market in 2022, realised correlation between stocks has been going down. This means that stocks are moving less and less in sync with each other. That has helped bring down the implied correlation, a measure of how closely stocks are thought to move together, to all-time lows.
But since the beginning of 2024, the gap between the market’s winners and the rest has grown even bigger. This is because a few megacap stocks have helped to hide the losses of other names in the benchmark index.
The returns seen by Nvidia Corp. NVDA, +0.75% make this point more clear than anywhere else. The stock of the company has gone up almost 147% since the start of the year. In percentage points, this makes it the second-best performer in the S&P 500. The only company that has done better than Nvidia is the much smaller Super Micro Computer Inc. SMCI, +2.31%, which joined the index in March as demand for its servers grew.
Analysts at UBS Group say that Nvidia has been responsible for more than a third of the 12.3% rise in the S&P 500 in 2024. Based on Dow Jones Market Data, the chip designer was only the third U.S. company last week to have a market capitalization of $3 trillion or more. A 10-for-1 stock split took place on Monday.
Even though Nvidia’s gains are huge, especially for such a big stock, other megacaps have also seen big gains this year. The 10 biggest companies in the S&P 500 have all done very well this year. After Nvidia, the best performers are Eli Lilly & Co. LLY, +1.77% (up 48%), Meta Platforms Inc. META, +1.96% (up 41%), and Broadcom Inc. AVGO, +2.41% (up 30%).
At the same time, FactSet data shows that shares of 301 companies in the index have gone down in 2024. Nearly 130 of them are down 20% or more. Well-known companies like Tesla Inc. (TSLA, -2.08%), which is part of the group of tech stocks called the Magnificent Seven and is now the 11th-largest stock in the S&P 500 by market value, and Lululemon Athletica Inc. (LULU, +0.13%) are among them.
But that doesn’t mean that only megacap stocks will have good returns in 2024. FactSet says that as of Friday night’s close, 73 stocks in the S&P 500 are up 20% or more.
An analysis from Richard Bernstein Advisors shows that the percentage of stocks that have done better than the index has been very low for the second year in a row. With the exception of 2023, 2024 is on track to be the year with the fewest S&P 500 stocks outperforming the index since 1999. As of Monday afternoon, the S&P 500 was up 12.2% for the year.
A report from Bespoke Investment Group says that dispersion has even grown in the highly regarded artificial intelligence market since the beginning of the second quarter.
According to Bespoke, AI beneficiaries worth more than $1 trillion were up an average of 11.5% since the beginning of April. However, shares of smaller stocks that were benefiting from the trade, such as many software names, did not do as well.
Six of the biggest companies in the U.S. by market value won: Microsoft Corp. MSFT, +0.95%, Apple Inc. AAPL, -1.91%, Nvidia, Alphabet Inc. GOOG, +0.50%, Amazon.com Inc. AMZN, +1.50%, and Meta Platforms Inc.
It’s not unusual for dispersion to rise during a bull market. Jonathan Krinsky, chief technical strategist at BTIG, told MarketWatch in an email that the market’s winners and losers tend to stand out more during a bull run.
There is a huge difference between the groups this time, which has caught Krinsky’s and other analysts’ attention. They think the most important question is when the interstock correlation might go back up, since that would probably happen at the same time as another selloff.
It’s possible for stocks that aren’t doing well to catch up to their peers, but Krinsky doesn’t think this is likely.
If the market goes up, will correlations also go up? That is possible, but Krinsky said, “It would probably be like a meltdown where everyone comes together.”
He said, “I think the most likely thing will happen is that correlations will rise from all-time lows as the market falls.” “That’s how things usually go.”
Options traders don’t see many risks coming up right now. This is because of the level of the Cboe Volatility Index VIX, which is called the stock market’s fear gauge. They think that stocks, or at least the S&P 500, will stay calm over the next month.
FactSet says that as of Monday afternoon, the index, which is based on trading activity tied to S&P 500 index options, stayed below 13. The gauge hasn’t gone up much since mid-December, when it hit its lowest point in four years. It goes up when stocks go down and down when stocks go up.
All three major stock-market indexes along with the small-cap Russell 2000 were trading higher Monday afternoon, with the S&P 500 up 0.2% at 3,355 and the Nasdaq Composite COMP up 0.1% at 17,156. While this is going on, the Dow Jones Industrial Average DJIA is up 50 points, or 0.1%, at 38,852.
