The year has been exceptionally profitable for investors involved in the S&P 500, especially those who have invested in a select few tech stocks. However, the majority of the index has experienced a lackluster performance, mainly due to the underperformance of some prominent companies.
Macro Uncertainty and Fed Funds Rates Impact Broader Market
According to Keith Lerner, co-chief investment officer at Truist, the average stocks in the S&P 500 better reflect the broader macroeconomic uncertainty and the significant increase in the Fed funds rates over the past year. This has resulted in a divided performance within the index.
Tech Stocks Drive S&P 500’s Year-to-Date Advance
Data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, reveals that the S&P 500’s 15% year-to-date advance has been primarily fueled by seven stocks, driven by hype around new generative AI technology.
Biggest Companies Generate Majority of S&P 500’s Returns
Goldman Sachs highlights that 15 of the biggest companies have driven 86% of the S&P 500’s return year-to-date, indicating a concentration of performance within a handful of stocks.
Tech Giants Leading the Charge
Nvidia and Meta have emerged as the frontrunners in the S&P 500, with respective gains of 180% and 133%. Tesla has also experienced significant growth, with its shares up 109%. Companies like Apple, Amazon, Microsoft, and Alphabet have capitalized on AI advancements, resulting in substantial stock price gains.
Factors Driving Tech Stock Performance
The outperformance of these tech stocks can be attributed to various factors. First, many of these stocks started the year oversold, which contributed to the subsequent upward momentum. Second, the hype surrounding AI technologies has fueled investor enthusiasm. Lastly, the fear of being left behind in the tech race has compelled companies to continue investing in technology, thereby supporting tech earnings.
Non-Tech Companies Struggle
While tech companies have thrived, non-tech companies have faced challenges. CVS Health, Moderna, and VF Corp have experienced declines of 26%, 34%, and 31% respectively, indicating a lackluster performance.
Expectations for the Second Half of the Year
Market experts such as Keith Lerner and Brian Belski anticipate a modest broadening out of the market’s rally in the second half of the year. This projection is based on investors seeking out bargains and betting on no rate hikes in 2024.
Opportunities in the Market
Despite the dominance of tech stocks, there are opportunities for other companies to gain favor among investors. Here are three relative laggards from the S&P 500 that could potentially attract attention:
1. AT&T: Deep Value Play
AT&T (T) has faced challenges in the first half of the year, with declining subscriber growth and softer-than-expected sales impacting investor sentiment. However, David Sekera, chief US market strategist at Morningstar, believes that AT&T is a top pick. He considers the company to be a deep value play with long-term structural cost advantages.
Furthermore, AT&T’s CFO Pascal Desroches has mentioned that key parts of the business have started to turn the corner, providing additional positive signals.
2. Occidental Petroleum: Betting on Oil
Occidental Petroleum (OXY), backed by billionaire investor Warren Buffett, has struggled amid concerns of softening oil demand and sluggish global economic growth. Despite this, Warren Buffett has increased his stake in the company, indicating his confidence in its potential. Lee Munson, CEO of Portfolio Wealth Advisors, sees an opportunity to invest in Occidental Petroleum, given its ownership of a significant portion of the Permian Basin, which has cheap production potential.
3. Cisco: Overlooked Potential
Cisco (CSCO) has lagged behind its tech peers and the broader S&P 500 due to a challenging macroeconomic environment and declining IT spending. However, David Trainer, CEO of New Constructs, views the recent underperformance of Cisco as a buying opportunity. He highlights the company’s strong fundamentals, including a return on invested capital (ROIC) of 15%. Additionally, Trainer believes that Cisco’s attractive valuation implies conservative profit growth, presenting the possibility for higher growth than anticipated.
Broadening Market Breadth
Experts predict that the narrow market breadth will continue to broaden out, allowing opportunities for a wider range of companies to attract investor interest. While tech stocks have been the primary drivers of the S&P 500’s performance, the second half of the year may see a shift as investors explore other investment options.
In conclusion, while tech stocks have dominated the S&P 500, there are indications that the market may broaden out, providing opportunities for other companies to gain favor. Investors should consider the potential of undervalued companies like AT&T, Occidental Petroleum, and Cisco, which could benefit from changing market dynamics and investor sentiment.