Let’s start with the bottom line of this update: it’s a tech stock driven market. Going from worst to first, technology stocks have carried the markets higher in 2023. These are the same securities that dragged the markets into bearish territory in 2022. Just as the calendar page turned from 2022 to 2023, so has the market’s leadership.
Markets are higher because technology stocks are higher. Technology stocks make up more than 40% of the S&P 500’s market capitalization (sum of the information technology and communications sectors plus Amazon and Tesla). Although the S&P 500 is made up of 504 individual stocks, the eight largest stocks are all technology-based and are responsible for north of 27% of the index’s movements. That is not exactly what you call a “balanced” index. If those technology stocks do well, the market will generally also do well due to its tilt towards those few securities.
Year-to-date alone, Nvidia is up 200%; Tesla is up 150%; and Meta is up 130%. Apple, Amazon, Microsoft, and Google (2 share classes) are all up around 40%. Needless to say, these eight stocks have inflated the market’s strength. Only the three market sectors who have exposure to technology-related stocks are outperforming the S&P 500 year-to-date, and they are doing so by a wide margin. Meanwhile, the other eight sectors have underperformed the market index by at least 8%, and four sectors are down on the year (including financials and health care- the 2nd and 3rd largest S&P 500 sectors).
The chart below shows the performance of the S&P 500 sectors for both 2022 and 2023. Notice that the sectors that were by far the worst last year have been by far the best performers this year.
Source: Canterbury Investment Management
It is a narrow and thinning market. On one hand, you have more stocks starting to show favorable characteristics, but on the other hand, those stocks have largely been concentrated in a few select areas. While the market has risen over the past few months, the Advance-Decline Line (number of stocks increasing versus decreasing) has been putting in lower highs. In other words, the generals (larger stocks) are out fighting the battle, while the troops (smaller majority of stocks) are retreating. That is not favorable for the market.
It’s a technology driven market. When tech stocks do well, the market also generally does well given its allocation to tech stocks. The way that the market has behaved this year is a bit dangerous by observation. There is a small, select group of stocks rising and carrying the market, while a larger group meanders around.
Sharp and fast rises can be just as dangerous as steep declines. It’s not a healthy sign for a stock to be up 200% in 6 months, like Nvidia. That is a tough pace to keep up with. New buyers are more likely to be buying near a peak than they are to see the stock double in price again. When you couple the fact that a few large securities are rising quickly, while a larger majority hasn’t moved much this year, that could be a recipe for a decline. If technology stocks begin to falter, they could drag the markets backwards, if other sectors also continue to underperform.