07 DECEMBER 2023
The recent rally in tech stocks and crypto prices suggests risk appetite is improving and argues for other equity markets performing well as we head into year-end.
But does it?
The chart below shows the year-to-date performance of the market-cap weighted S&P 500 versus the equal-weighted version, both in dollar terms.
The market-cap weighted index (which is more commonly referenced) is up around 17% on a total-return basis, whilst the equal-weighted version is around flat. Why so?
This is all due to the stellar returns of the mega tech stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla; the so-called “Magnificent Seven”. Collectively, they represent almost 30% of the market-cap index and have all produced strong double-digit gains this year. Without them, the S&P 500 has gone nowhere with many of the underlying stocks nursing substantial losses.
There are several reasons why the tech names are leading including their superior earnings growth (helped by the artificial intelligence boom) and the growing preference for passive over active investing. This naturally increases the demand for the larger-weighted stocks relative to their small-cap peers (at least when the overall market is trending higher).
Such momentum makes it hard to bet against the “Magnificent Seven,” but some of the more cyclical stocks have a lot of catch up potential if investor risk appetite continues to improve.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed are a matter of opinion but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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