The near-5 per cent advance in the $20tn benchmark S&P 500 this year has been reliant on the performance of only a few dozen stocks — with gains by the likes of Apple and Facebook accounting for more than 20 per cent of the index’s climb.
Ten stocks in the index, including ecommerce behemoth Amazon, Google owner Alphabet as well as the more defensive cigarette maker Philip Morris International, have shouldered roughly half of the S&P 500’s 4.7 per cent gain in 2017, according to data from Fundstrat Global Advisors.
Forty stocks, or eight per cent of companies on the S&P 500, constitute 85 per cent of the index’s points return, the data show.
Thomas Lee, head of research at Fundstrat, said the advance was “notably defensive and concentrated” with his colleague Sam Doctor noting that the clustering of leadership was “unusual” in a typical year.
The top 10 contributors hail predominantly from the technology sector, which has advanced 11 per cent so far this year and outpaced every other.
Apple, the most valuable publicly traded company with a market valuation of $744bn, is responsible for 15 of the 106 points the S&P 500 has climbed this year.
“Leadership . . . has been so thin for a long time,” said Katie Stockton, a strategist with BTIG, pointing to the drop in the number of companies hitting new annual highs. “When we saw the market advance from the election low in November, we saw a nice increase in 52-week highs. But it was fleeting, it didn’t last long.”
Investors have taken a conservative bent in US equities since the start of March when Donald Trump’s administration failed to push healthcare reform through Congress, buying high growth and defensive stocks, said Erin Browne, head of macro investments at UBS O’Connor, the bank’s multi-strategy hedge fund.
The French election, as well as military strikes in Syria, have added to the risk-averse mood.
“Over the shorter term investors want to be in larger more liquid asset classes,” she said. “Defensives are high dividend payers and the high growth assets are seen as still delivering growth in a low growth environment, which tends to favour the technology sector.”
Dave Lutz, the head of ETF trading at JonesTrading, said the narrow leadership of the market was partly down to the rise of passive investing strategies.
Companies like Apple have found a bid from multiple ETF buying bases, including those that track the S&P 500, the Nasdaq 100 or the broader technology sector.
Nearly $65bn has flowed into passively managed US stock funds this year, according to EPFR. Actively managed funds have suffered redemptions of $47.6bn over the same period.
“A lot of times [investors] are just buying the stocks most representative of the market,” Mr Lutz said. “I don’t see it as a red flag at this point of time but it starts to feel that we’ve read so much about passives domination and how active management is dead. It feels like that trade may be getting long in the tooth.”
About $2tn of assets directly track the S&P 500 while $7.5tn to $8tn use it as a benchmark.
“The challenge with it becomes that it may not be reflecting the underlying economy,” said Shannon Cross at Cross Research. “People think about the S&P 500 as a reflection on how the economy is doing but if it is driven by just a few stocks then it becomes less useful.”
Apple has soared to repeated new highs so far this year, climbing 25 per cent to $145.46 at its peak.
Ms Cross added that the prospects also look positive with tech companies likely to benefit from potential repatriation policies from the current administration.
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