Since Covid-19, the US stock market performance has had two distinct groups: Growth (Technology/Communications/Healthcare) and Value (Financials/Industrials/Energy/Materials).  Leadership has never been more concentrated.  There are five technology stocks leading the S&P 500 and now represent 20% of the index, but these companies only represent 4% of US GDP revenue (see chart below).  There are 10 stocks in the Nasdaq index (representing 45% of the index) that are responsible for performance being up on the year whereas the average stock in the index is down 13%.  In other words, the S&P 500 and Nasdaq indices do not represent the average stock much less the US economy on the whole.  Value stocks, such as banks and industrials, and small cap stocks are down roughly 18% and are more representative of the US economy.

Importantly, a potential shift appears to be occurring in these two markets since last week as most regions have reopened.  Value stocks (and small caps) are beginning to outperform growth stocks (see second chart).  It is possible for the market to climb higher should breadth cause the average stock to participate more in the economic recovery (and the concentrated growth stocks don’t lose too much luster).  From a technical perspective, the S&P 500 index appears overbought, but when >90% of stocks are above the 50-day moving average, it is a “good overbought” as historically this is a bullish indicator of further momentum.

Please see our presentation for more details. Click here.

Will Skeean, CFA

Partner – Investment Management Team Chair