The recent underperformance of most stocks on Wall Street has stirred concerns regarding the outlook for the stock market. Despite this, many see this as a setup for future gains.
Discrepancy in Performance
While the S&P 500 has seen a 12% increase this year, the majority of stocks have not shown significant growth. Big Tech stocks have been driving the index's performance with double-digit gains, fueled by advancements in artificial intelligence and brighter earnings growth prospects.
Lack of Collective Movement
However, Big Tech represents only a portion of the S&P, with the majority of stocks failing to contribute substantially. The Invesco S&P 500 Equal Weight exchange-traded fund, which provides an equal weight to each stock in the index, has only seen a 2% gain this year and is below a recent peak reached in February.
Concerns on Stock Breadth
The limited breadth of well-performing stocks is causing unease on Wall Street. If Big Tech stocks stumble – as they have shown signs of doing recently – there are worries that the S&P 500 will suffer unless other stocks step up to compensate.
Economic Backlash on Stocks
Many economically-sensitive or "cyclical" stocks are struggling to regain their highs due to concerns over reduced profitability as economic growth decelerates. Some strategists predict a potential drop in the S&P 500 from its current level of around 4,300 to 3,700.
Market Reflection
The poor breadth in stock performance is seen as a reflection of a market that is off balance by experts like John Kolovos, chief technical strategist at Macro Risk Advisors.
Hope in Tech Stocks
Despite these challenges, the market downturn may not signify its demise. There is optimism regarding the long-term potential for Big Tech stocks, with analysts projecting double-digit annualized earnings per share growth for the sector in the coming years, excluding Apple (AAPL) according to FactSet.
Exploring Opportunities Beyond S&P 500
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Finding Potential in Cyclicals
Secondly, other stocks, such as cyclicals, can rally. Once the Federal Reserve stops hiking interest rates, the economy should stabilize. That could send the price of commodities higher, a boon to oil and metals and mining stocks. Beaten down bank stocks could recover, too. Even defensive stocks, or those that benefit from stable profit regardless of the economy, could rise since they’ve already had a down 2023 after a strong 2022.
Historical Evidence of Possibilities
The point is that there are plenty of names to pick up the slack for the S&P 500 even if any one of these groups falters.
History proves the point. Recently, the majority of S&P 500 stocks have remained below their one-year highs, according to RBC. When that happens, dating back to 1990, the S&P 500 can often return double digits for the following 12 months. Sometimes, returns are negative for the coming year, but returns are positive when the market is sniffing out an economic recovery soon enough.
In early 2020, for example, the index swiftly plummeted, with most stocks getting crushed, but the following year brought about an explosive S&P 500 gain as the market had confidence that the pandemic-induced recession would quickly fade, with monetary and fiscal stimulus taking the economy higher as it reopened.
Market Expectations and Outlook
Today, markets are indeed expecting the economy to bottom soon. The residual impact of higher rates are still working through the economy, as seen by the fact that some still see a recession coming. But markets expect a stabilization to follow, so more stocks can join the rally, aiding index gains.
Right now, poor breadth is probably a positive sign, even if it feels scary.
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