Household Names Can’t Carry the Stock Market Forever

A new and red-hot earnings season has officially kicked off. 

If things pan out as expected, it should help justify the current bull-run that’s pushed the S&P 500 26 percent higher over the last 12 months.

While Delta’s weaker guidance on Thursday–and subsequent four percent stock drop–was not a great start, the airliner is unlikely to define the trend moving forward. Analysts expect S&P 500 companies to see 8.8 percent higher earnings per share compared to a year ago, according to FactSet. 

If that holds, it would mark the best showing for corporate America since the start of 2022. Plus, it would signal inflation is no longer eating into profit margins as much as before.

What I’m wondering is whether this momentum can last in such a top-heavy market.

Big banks like JPMorgan and Wells Fargo report earnings today, though the mega-cap stocks aren’t due for another two weeks. Those will be the ones that matter most. 

Remember, the top 10 stocks in the S&P 500 account for 35 percent of its total market cap.

Household-name tech giants have such a pronounced influence that last week the strategy team at Piper Sandler dropped their index-level coverage of the S&P 500. Concentration has become so lopsided, in their view, that tracking the entire benchmark no longer provides a clean snapshot of the market.

Indeed, a sizable chunk of tech outperformance can be chalked up to AI hype, which will eventually fizzle. 

As things stand, a record low share of individual S&P 500 stocks are outperforming the index, as illustrated in the chart below from Apollo chief economist Torsten Sløk.

It makes sense to expect investors to rotate into other sectors at some point.

We got a taste of this broadening out on Thursday, and it took place at the expense of the wider market. After June CPI came in cooler than expected, Nvidia, Meta, and Tesla all tumbled 5.6 percent, 4.1 percent, and 8.4 percent, respectively. 

The Magnificent seven together saw a combined $600 billion of market cap wiped out. Another wild stat: It was the ninth worst day for the index, but the 10th best day for market breadth, according to Bespoke.

The typical stock, meanwhile, did just fine. Invesco’s Equal-Weight S&P 500 ETF finished the day 1.4 percent in the green and the small-cap Russell 2000 closed 3.7 percent higher.

There were signs of this shift earlier in the first quarter, too. Analysts estimated a growth rate of -5.7 percent for the S&P 500, excluding the Magnificent seven. It came in at 0.3 percent, according to data from Ned Davis Research. 

Now for the second quarter, consensus calls for 1.1 percent growth rate for the same group. 

To be sure, none of this is to declare the death of the AI trade or tech bullishness. Those should continue without a hitch at least through another earnings season.
But especially as Fed rate cuts loom, my initial question stands: What happens if this rotation from the top really takes hold?