(Bloomberg) – The S&P 500 is still technically in a bear market, but a closer look beneath the surface reveals that most of its stocks are in the midst of a major rally.
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While the benchmark is down 17% from its record high on Jan. 3, 2022, about three-quarters of the stocks in the index are 20% or more above their 52-week low, according to data from Bloomberg. Standout companies include Wynn Resorts and Boeing Co., both of which are up more than 60% in the last three months alone.
So why isn’t the S&P 500 rising? This is due to the ugly performance of a handful of technology-related stocks, whose massive market values give them a larger influence on the market-cap-weighted index. Just five stocks — Apple Inc., Amazon.com Inc., Tesla Inc., Microsoft Corp. and Meta Platforms Inc. – are responsible for almost half of the S&P 500’s losses over the past 12 months.
For example, Apple and Microsoft, each with around $2 trillion in market value, have a combined weight of more than 11% in the S&P 500, giving them more impact on the index’s performance than any of the energy, materials and utilities companies in the benchmark. Although American Airlines Group Inc. is up 34% this year, its 0.03% weighting does little to propel the index higher.
To get a broader view of what’s happening with stocks, some market experts watch a version of the S&P 500 that weights all stocks equally. This index beats the S&P 500 by the widest margin since 2019, and is up 17% since its bottom on Sept. 30.
It’s important to follow the equally-weighted index because it provides a “deeper look” at the overall recovery, according to Dan Wantrobski, director of research at Janney Montgomery Scott. “This gives us more confidence that stocks should continue to bottom this year,” he said.
The story goes on
Stocks rallied for the first two weeks of the year on optimism that cooling inflation will prompt the Federal Reserve to ease its most aggressive rate hike campaign in decades. The S&P 500 gained 2.7% this week after government data showed consumer prices rose at the slowest pace in over a year in December.
Communication services and consumer discretionary stocks were among the top performers in the S&P 500, with companies like Warner Bros Discovery Inc., United Airlines Holdings Inc. and Carnival Corp. increased by more than 20%.
According to Phil Blancato, chief executive officer at Ladenburg Thalmann Asset Management, the strength outside of the technology sector is a positive development for the average investor.
“A diversified portfolio lowers risk and gives you the opportunity to outperform,” he said in an interview. “Diversification beats concentration.”
At the same time, growing investor risk appetite amid hopes of a less aggressive Fed has also boosted some of 2022’s worst performers, like Amazon, which is up 17% in the first nine trading days of the year. However, not all technology stocks participated. Apple and Microsoft are still lagging behind the S&P 500.
After this week’s inflation data, investors are turning their attention to the earnings season, which kicked off on Friday with earnings from JPMorgan Chase & Co. and Wells Fargo. The results of the largest US banks met with little enthusiasm on Wall Street. The Fed’s next interest rate decision is due on February 1 and the market is expecting a 25 basis point rate hike compared to December’s 50 basis point hike.
–Assisted by Matt Turner and Jessica Menton.
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