Big Tech Stocks Outperform; Stocks vs Bonds; a Perma-Bear’s Warning

By the Curmudgeon

The Beat Goes On:

We’ve noted in many recent Curmudgeon posts that this year's stock market rally has been led by just a few big tech names. AI darling Nvidia (NVDA) has accounted for nearly one-third of the S&P 500's gains this year. As of the close on June 24^th, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Broadcom (AVGO) had also contributed more than a quarter of the S&P’s gains in 2024.

The DJI (3.77% YTD) and Russell 2000 (-0.23% YTD) were both down on June 25^th, but big tech rallied strongly. That boosted the NASDAQ which rose +1.26%. Also, NVDA closed +6.76%, GOOG +2.65%, META +2.34%, MSFT +0.73%, while other big tech stocks also rallied today.

Outperformance in quarterly results from large-cap tech continues to be a reason why earnings for the S&P 500 are growing year over year. Investors have gorged on large-market-cap stocks that have held up well in the higher rate environment and are seeing earnings grow more than their smaller peers. Big tech outperformance is clearly depicted in the chart below:

Don’t Worry About Narrow Breadth???

Morgan Stanley's chief investment officer, Mike Wilson, found that only 20% of the top 500 stocks are outperforming the broader index over a rolling one-month period. This is the lowest percentage of companies outperforming in Wilson's dataset dating back to 1965.

"Narrow breadth can persist but it's not necessarily a headwind to forward returns in and of itself," Wilson said. "We believe broadening is likely to be limited to high quality/large cap pockets for now."

Cartoon of the Week:

Cartoon courtesy of Hedgeye

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U.S. Stock vs Bond Index Returns:

Another recurring theme this year has been stocks rising strongly while U.S. Treasury notes and bond prices have fallen. The outperformance of stocks over bonds since 2009 is even more striking.

According to Dow Jones Market Data via the Wall Street Journal, the S&P 500 has logged a total return of more than 980% since U.S. stocks bottomed in March 2009. Contrast that to the Bloomberg U.S. Aggregate Bond index’s total return of only 50% over the same period.

àThat means stocks have returned 19.6 times the total return on bonds for the last 15 years and 3 months! That’s a big WOW!

A Perma-Bear Rings the Bell at the (Presumed) Top:

In his latest market commentary (June 24^th), self-proclaimed Perma-Bear John Hussman wrote (emphasis added):

“The main reason I have not advocated a constructive stance since 2021 is that market internals have remained divergent throughout this period, valuations remain beyond 1929 and 2000 extremes, and my view remains that the period since 2021 comprises the extended top formation of one of the three great speculative bubbles in U.S. (stock market) history.”

“Based on the present combination of extreme valuations, unfavorable and deteriorating market internals, and a rare preponderance of warning syndromes in weekly and now daily data, my impression is that the speculative market advance since 2009 ended last week. Barring a wholesale shift in the quality of market internals, which are quickly going the wrong way, any further highs from these levels are likely to be minimal. In contrast, current valuation extremes imply potential downside risk for the S&P 500 on the order of 50-70% over the completion of this cycle.”

The chart below shows Hussman’s most reliable gauge of market valuations, based on correlation with actual subsequent S&P 500 total returns in market cycles across history. The chart shows the ratio of nonfinancial market capitalization to gross value-added, including estimated foreign revenues. The present level exceeds both the 1929 and 2000 extremes and is higher than every point in history except for five weeks surrounding the January 2022 market peak.

Here’s something you don’t see very often: a 5-year high in the S&P 500 with negative leadership (more stocks at new 52-week lows than new highs), particularly coupled with very little bearish sentiment. That combination, as simple as it seems, is an indication of trouble under the surface. We saw this one on Monday, June 17^th.

“In sum, a simplified way to understand our market outlook is that valuations inform our long-term and full-cycle views, market internals inform our intermediate term views, and a boatload of weekly and daily syndromes relating to overextension, compression, phase transition, and reversal inform our near-term views. I don’t think it’s generally possible to identify market peaks and troughs in real-time, but there are unusual points in history when one observes a sudden deluge of conditions that suggest a speculative climax or risk-averse capitulation. Our investment discipline is to align our outlook with observable, identifiable, quantifiable measures, and no forecasts are required. It’s just that every now and then, those observable measures arrive by the bucketful.”

“Even a speculative peak would not necessarily imply immediate market losses. Both the closing and intraday peaks of the tech bubble occurred on March 24, 2000, followed by a steep initial decline. But the S&P 500 clawed its way to nearly the same level by September 1, 2000, and slightly exceeded the March 24, 2000 high on a total return basis. Likewise, the “motherlode” of warning flags we observed in November 2021 was followed by an initial decline, but the closing high of the S&P 500 occurred several weeks later, on January 3, 2022, at a level about 1.1% above the late-November intra-day high.”

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Be well, stay calm, success and good luck. Till next time…….

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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