Good morning my people. Phil Rosen here.
One thing that pops up no matter where you look is the Pareto distribution.
It’s a probability model that’s also been dubbed the 80-20 rule, and it illustrates how a tiny number of causes are responsible for the lion’s share of effects.
For example, it’s like how the top 20% of sales people produce 80% of the revenue, or how 20% of factories produce 80% of pollution.
(Don’t fact check those — I didn’t consult ChatGPT on them!)
Anyway, this lopsided distribution is exactly what’s showing up in the stock market right now.
1. The S&P 500 has climbed about 9.2% this year, but just five stocks are powering most of that gain in an even more extreme rendition of the Pareto distribution.
The five biggest names by market capitalization include Apple, Nvidia, Alphabet, Microsoft, and Amazon. Together, those have outperformed the index by 30 percentage points this year, and now that May’s over, have beat it for five consecutive months.
This year’s rally is being propped up by Nvidia (+167%), Apple (+43%), Alphabet (+38%), Microsoft (+37%), and Amazon (+39%), with Nvidia the shining star of the bunch on the back of its lead in the AI arms race.
Just this week, the chip maker joined the others in the $1 trillion-valuation club.
While just five companies out of 500 seems like a pretty concentrated distribution, there’s reason to think the rally can keep going even if the tech sector starts to fade.
“[Many] investors have become increasingly concerned about the potential effects that this top-heavy market could have on overall performance, especially if momentum in these names begins to wane,” Brian Belski, chief investment strategist at BMO, wrote this week.
“However, our work shows that once relative performance of these mega-caps has subsided or winning streaks have ended, the broader market has historically held up just fine with gains being more common than losses.”
In previous streaks of strong outperformance of five months or more by supersized companies, he pointed out that the S&P 500 has averaged returns of 6.7% in the subsequent six months.
And when you push that to 12 months, the index returns an average of 22.2%.
“[P]utting mega caps aside, we found that narrow market breadth in general does not represent a bad omen for S&P 500 performance despite the contrary narrative being pushed by many investors,” Belski added.
What’s your outlook for the rest of the stock market this year, not including mega-caps? Tweet me (@philrosenn) or email me (email@example.com) to let me know.
In other news:
2. US stock futures edge higher early Thursday as the crucial deal to raise the debt ceiling passed the House of Representatives and moves to the Senate. Check out the latest market moves.
3. Earnings on deck: Dell Technologies, Broadcom, and more, all reporting.
4. The AI-software market will boom to $787 billion by 2026. Bank of America strategists just named the 20 stocks that will lead the way — and you can get the list here.
5. Elon Musk told officials in Beijing that he is opposed to the US and China breaking economic ties. He reportedly expressed his disapproval of a potential decoupling while meeting with China’s foreign ministers: “The interests of the United States and China are intertwined like conjoined twins.”
6. Investors are losing hope for a Fed pause. Now, markets are bracing for another rate hike at the June meeting. Here’s what top experts have forecasted.
7. Real-estate investors are retreating from the housing market at a record pace. Redfin data shows that home purchases by investors dropped 48.6% in the first quarter compared to a year ago. That’s the largest annual decline since Redfin began taking records in 2000.
8. A financially independent real-estate investor shared his strategy to score low rates in today’s market. He just locked in a 2.5% interest rate on his latest deal — here’s how he did it.
9. This top-1% fund manager shared his four-part process for finding outstanding stocks without overpaying. Pinning down quality without coughing up a premium price is difficult to do, but Larry Pitkowsky says he has a specific method. He also shared his six favorite names to buy now.
10. Bitcoin just clocked its first monthly drop of the year. The token had a stellar start to 2023, but slipped in May. Market experts say the rally has taken a breather as traders assess the uncertain macro picture.