The S&P 500 closed out the first quarter with a strong gain—a total return (including dividends) of 7.5%. But a look under the hood reveals some large divergences and narrow market breadth. First, just seven stocks—Microsoft, Apple, Alphabet, Nvidia, Meta, Amazon, and Tesla (MAANMAT?) account for nearly all the market gains. Without these stocks, the S&P 500 was only up 1.4%. Furthermore, only one-third of S&P 500 constituents beat the benchmark—much lower than the 50% that typically outperform.
Comparing the performance of the equal-weighted S&P 500 versus the normal, market-cap weighted version of the index paints a similar picture. In the first quarter, the equal weighted index was only up 2.9%, trailing the market cap weighted index by 460bps. A spread of this magnitude is unusual and is exceedingly unusual when the market is rising (investors usually seek safety in the largest companies when stocks are falling). There has only been one other time since 1990 that the market cap index beat the equal weighted index by a larger amount, while the index was up. That was at the tail end of the dotcom bubble in the fourth quarter of 1999. Other episodes rounding out the top 5 all occurred in the late stages of bull markets in 1998 and 2007.
So what to make of this?
- We wouldn’t use this analysis to suggest that an imminent downturn is likely, but history suggests a spread of the current magnitude between the equal weighted and market cap weighted typically only happens in the later stages of a bull market. Importantly, this is not the hallmark of the start of a new bull market. In fact, quite the opposite. The equal weighted index usually outperforms in the early stages of a bull market.
- As a result of the very strong outperformance of mega-cap growth stocks, the Russell 1000 Growth index is expensive once again. Its forward P/E is nearly 70% higher than the Russell 1000 Value P/E—about twice the long term average. We think value stocks look more appealing here. If the economy has a soft landing, the cyclical parts of the value index will probably have strong relative gains. But if the economy has a harder landing, earnings for almost all companies will be at risk and those with the highest relative valuations versus history would seem to be most vulnerable.
- While mega-cap “tech” has performed like a defensive, investors can get much cheaper defensive exposure in consumer staples or utilities, whose valuations look low for a late cycle environment where recession risks remain elevated.
Read the original blog Got MAANMAT? 3 April 2023.
Main contributors: David Lefkowitz, Nadia Lovell, and Matthew Tormey
This content is a product of the UBS Chief Investment Office.