There is only one trade

Unhedged

Katie Martin and Robert Armstrong examine why US equity markets look stable even though most S&P 500 stocks are underperforming. They argue that a narrow group

Key takeaways

• The hosts say the top 20 US stocks are compensating for weak performance across the other 480 S&P 500 constituents.
• Breadth collapsed from 70% of S&P 500 stocks at or above their 50-day moving average on August 14 to 28% by the time of the episode.

Main topics

• US stock market concentration
• AI trade and tech leadership

Notable quotes

Stocks right now are not really what they seem.

Conclusion

The episode offers a useful warning that headline index strength can hide broad

Transcript preview

Speaker 1 (0:00) Stocks right now are not really what they seem. You look at the big indices, especially in the US, and the first thing that strikes you is how upbeat and stable they are. It's quite a sight, actually, given the long war in Iran and the endless horror show that is the government bond market. The thing is... All that stability comes from a tiny number of companies. The top 20 stocks in the US are making up for a pretty poor performance in the other 480 in the benchmark S &P 500 index. Three quarters of stocks in that index fell in September. We're all used to markets being a bit skinny, but it does feel like they're overdoing the fat jabs. So... today on the show, do lopsided markets mean we have a lopsided economy? And is this whole thing a problem yet? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist at FT Towers in London, where, inexplicably, it is still summer. Joining me down the line from the Big Apple is the big fella, Mr Robert Armstrong. Rob, are you feeling lopsided? Speaker 2 (1:16) I'm not feeling thin, I'll tell you that. Although your joke about the fat jabs makes me regret. I should have named my column about this the GLP-1 market. That would have been a good gag, and I missed an opportunity there. Speaker 1 (1:30) You missed an opportunity. I was expecting to get more lols for my rock me Amadei joke in the newsletter today, but it fell a bit flat, I've got to tell you. We'll keep trying, Katie. Speaker 2 (1:41) Failure is no barrier here at Unpatched. Speaker 1 (1:45) If a gag's worth making, it's worth making repeatedly. So look, market concentration, not new. It's been like a big theme in markets, I'm going to say for a couple of years now. We all know that there's this thing where tech stocks are really big, but people worry about it and then they don't, and they're worrying about it now. Why are we worrying about it now? Speaker 2 (2:06) Well, I would make your point even more strongly. We know that historically markets... at all times and everywhere, tend to be driven by a relatively small number of their constituents. But it's relatively rare to see the change happen so quickly from a relatively broad market to a relatively narrow one. So when market nerds like us talk about breadth, What we're talking about is how many of the constituents of a market or an index are rising versus falling. So on the 14th of August, 70 % of the stocks in the S &P 500 were at or above their 50-day moving average, which is a kind of proxy. So they're doing pretty well. They're doing pretty well. Right now it's at 28. And that all happened in the intervening month or two. And it's like the chart falls down. And it's especially weird that this kind of collapse should happen when the market as a whole is just going sideways like nothing at all is going on. Speaker 1 (3:13) And Speaker 2 (3:14) I feel like we are right now playing our favorite game. Charts on the radio, radio. But I'm looking at this chart here. And we had a similar collapse in breadth back in the spring when the war in Iran started. But then the market went down. I mean, of course, most stocks fall when the market falls, right? That's normal. But this is a case where the market is chugging along and breadth is just falling away precipitously. Speaker 1 (3:42) Yeah, so if you take the median stock in the S &P 500, it's having a shocker, right? It's doing really badly. But the index is still, like you say, chugging higher. NASDAQ, is it the NASDAQ 100 that's up? At a record high or thereabouts? I Speaker 2 (3:59) think Speaker 1 (3:59) it's Speaker 2 (3:59) at Speaker 1 (3:59) a record Speaker 2 (3:59) high. And this is easy to understand. I'm looking at, you know, by value, which stocks are keeping the market as a whole up. And it's, you know, in order of value contribution, Apple, Meta, NVIDIA, Microsoft, Advanced Micro Devices, Tesla, Micron, Intel, right? That's since the middle of August. So it's just this slice of the market. That is keeping the whole circus going. Speaker 1 (4:29) Yeah. There was Speaker 2 (4:30) an email in my inbox this morning from a large broker who shall remain anonymous that contained the following comment about the situation. We retain strong conviction in the AI growth story and believe AI-related investment remains a powerful tailwind for the broader equity market. Goes on in that theme for a little bit. Then it says... But the increasing concentration of market gains reinforces the importance of managing risk through a broadly diversified equity portfolio. So that message is basically go. I repeat, stop. Right. Yeah. Speaker 1 (5:11) This is fine. This makes no sense. But be careful. Yeah. Yeah. So as we were saying, concentration is not new. We've all been looking