Stocks are trading at record highs and the major market players have not changed.
Jared Blikre, a data scientist at Yahoo Finance, reported that stocks hit new intraday records alongside the index on Friday. The names are a who’s who of market leaders, with one exception: Nvidia stock (NVDA) was down after receiving a downgrade by New Street Research.
Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGLE), Costco (COST), Meta (META), Microsoft (MSFT) and Walmart (WMT), on the other hand, all saw their shares trade at intraday records on Friday.
Investors may be able to point the finger at the soft jobs report and the prospect of lower interest rates as a catalyst for that decision. At least for some of those winners.
Technology has been the big winner of low-interest-rate environments over the past decade, and the so-called hyperscalers in the AI ​​race—Amazon, Microsoft, Alphabet among them—are poised to become the arms dealers if another speculative investment boom breaks out.
But on Wall Street, it seems that spending too much time in this market analyzing the fundamental peculiarities that explain why the same group of market leaders continues to dominate the market is no longer a profitable exercise.
Indeed, Michael Kantrowitz, Piper Sandler’s chief investment strategist, abandoned coverage of the S&P 500 on Wednesday, writing that “talking about the S&P 500 to communicate investment information to institutional investors has become an exercise in futility.”
The 10 largest stocks in the index represent nearly 40% of the index’s market capitalization, Kantrowitz noted. Index performance and earnings growth are carried by this small handful of companies.
Rather than reflecting much of the fortunes of the business world, the benchmark stock index has become captive to AI trading. For some, this is not a flaw of the index, but a feature, as some analysts point out. supported by strategists at the BlackRock Investment Institute last week.
Sure, the S&P 500 may seem lopsided, reflecting the fortunes of a privileged few at the expense of the more measured progress (or struggles) of a quieter majority. But the idea of ​​an index is that investors can capture the market’s returns in whatever form they choose.
This dynamic often benefits the individual investor class seeking cheap exposure to the “market,” but it is a thorn in the side of portfolio managers who charge institutions more for their services as they seek to improve the returns available to the general public.
In other words, what institutional investors are looking for are returns – preferably above-market returns, of course – but above all above-market returns. not Markets come in all shapes and sizes. For big investors, safety is often paramount. And the hype around AI churning out new multi-billion dollar winners every week doesn’t seem entirely safe in that regard.
In 2020, before the pandemic upended markets, we spoke to Fundstrat’s Tom Lee, who saw Tesla’s rally (TSLA) stock that year as sign that investors are chasing their benchmark indexAt the time, Tesla shares were responsible for much of the gains in the Russell 1000 Growth Index (VONG), an index favored as a benchmark by many Fundstrat clients at the time.
To try to fill this gap, customers had a simple card to play: buy Tesla.
Friday’s market action – and much of what has been seen in stocks since May – seems to be reminiscent of that trend.
Because if the benchmark is no longer a useful benchmark, a portfolio manager has a (seemingly) simple choice to make: either buy more stocks at the top of your benchmark, or find another way to explain your performance.
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