Chart of the Week

CYCLICAL STOCKS SHOULD BE PERFORMING BETTER

A notable feature of the recent gains in global equities has been the dominance of the so-called “Magnificent Seven” US tech stocks. As the Financial Times notes, over the past 12 months they are collectively up around 80% and account for more than half of all US stock market gains. Indeed, the median stock (out of almost 5,000 listed) is nursing a loss.

This trend is captured in the chart below, which shows the ratio of the equal-weighted S&P 500 index (in which all stocks share the same % allocation) versus the market-cap equivalent. The latter is heavily dominated by “big tech” with the Magnificent Seven representing around 30% of the S&P 500 market cap index.

So when they outperform this line falls and vice versa. The scale of the decline in this ratio since late 2022 shows just how dominant their performance has been.

Given the recent improvement in economic news flow we have been surprised that the more cyclical stocks have continued to lag; as shown in the ongoing decline in this ratio since the turn of the year.

However, if the manufacturing and trade data continues to perk up over the coming months we expect this trend to reverse and the likes of the resource, financial and industrial names to outperform their “Big Tech” counterparts.