No matter how much Americans love a winner, the losers in the stock market are starting to get their own attention. And there are a lot of them.
“At the megacap level, I think it’s just a story of momentum that’s been going on all year.” MarketWatch talked on the phone with Kevin Gordon, senior investment strategist at Charles Schwab. “I think the bigger story is under the surface,” he said.
Because of that story about momentum, Apple Inc. (AAPL, -0.82%) had to play catch-up with Nvidia Corp. (NVDA, +1.75%), which made chips for AI and gained another 9% this week. Apple Inc. AAPL, -0.82%’s stock price went up more than 7% after it announced its plans for “Apple Intelligence.” This made it compete with Microsoft Corp. MSFT, +0.22% for the title of most valuable company.
But the market is having a hard time besides a few megacap winners. More and more winners in the market-cap weighted S&P 500 index SPX and Nasdaq Composite COMP come from that small group of big winners. Since the beginning of the year, the S&P 500 has gone up 13.9%. It has gained another 2.9% so far in June.
The equalweight version of the S&P 500, which gives each of its parts the same amount of weight, is down 0.4% in June and has only gained 4.4% so far this year. The Dow Jones Industrial Average DJIA, which is more affected by cycles and, more importantly, is price-weighted, also falls behind the cap-weighted indexes. It was down 0.3% in June and is only up 2.4% so far this year.
The S&P 500 hit all-time highs even though less than half of its members were trading above their 50-day moving average. Mark Hackett, chief of investment research at Nationwide, pointed out in a note that the five biggest stocks have made up half of the year-to-date gain. 32% came from Nvidia alone. He said that these five stocks now make up a record 27% of the market capitalization of the index.
Looking at the average maximum drawdown at the member level, Gordon from Schwab said that the S&P 500 has already entered correction territory at -15%. The Russell 2000 RUT and Nasdaq, on the other hand, are well into bear market territory at -28% and -37%, respectively.
Analysts at Bespoke Investment Group say that the reason CNN’s Fear and Greed index is now in “fear” territory is because of the poor market breadth, which is a measure of how many stocks are moving with an index.
To be clear, Gordon said that market concentration is not the main thing that worries him. People who follow the market often point out that during rallies, a small group of stocks tend to make huge gains. Instead, people start to worry when just a few stocks are going up while the rest of the market is going down.
He said that something similar happened in 2021, which led to the bear market in 2022. That doesn’t mean the same thing will happen again, but investors should be careful.
He said that signs that the economy has hit a “soft patch” help explain why a lot of the market is weak. Gross domestic product growth in the U.S. for the first quarter was revised down from 1.6% to a weak 1.3% per year. Even though nonfarm payrolls numbers are good, there are signs that the job market is still “normalising” after COVID. It looks like the services sector will be stronger than manufacturing.
This may help explain why the S&P 500 went down this week, with drops of 2% and 2.3% in the cyclical sectors of energy and finance.
But Gordon doesn’t think the economy is going to crash. Instead, he thinks the market is going to be put to the test.
The market has gone through a period of cutting costs pretty quickly and is now waiting for sales to start growing again. He said that a correction could happen in the market if that doesn’t happen as breadth breaks down.
