News
The stock market rally has been all about large caps
Large-cap stocks have been the clear leaders in the 2024 stock market rally.
Bespoke Investment Group recently broke down the year-to-date performance of the S&P 500 (^GSPC) into 10 baskets of 50 stocks, organized by the size of their market capitalization value. The top decile of the index’s 50 largest stocks was the only subsector that outperformed the broader S&P 500 this year.
For Bespoke, this shows the recent trend in the markets generally has been “the smaller the stock, the weaker the returns.”
The shift to large-cap stocks comes as investors reduced bets on interest rate cuts from the Federal Reserve this year amid difficult inflation reports.
Larger stocks have demonstrated greater resilience to higher interest rates, in an environment where many expect rates to remain high for longer than initially expected.
This is partly because large caps have continued to post robust earnings growth. In the first quarter, research from Deutsche Bank’s chief global strategist Binky Chadha showed that profits from a basket of stocks called “Mega-Cap Growth and Tech” grew 39% compared to annual growth of 5.9% of the S&P 500. megacap basket includes the “Magnificent Seven” technology stocks, among some other big names like Netflix (NFLX), Visa (V) and Adobe (ADBE).
The NVIDIA logo and the Apple logo. (CFOTO/Future publication via Getty Images) (CFOTO via Getty Images)
This fundamental argument supported large caps when the outlook for interest rates and the path for economic growth have become less certain. Meanwhile, small caps continued to underperform, regardless of interest rate developments. Morgan Stanley Chief Investment Officer Mike Wilson wrote in a weekly note to clients Sunday night that this recent market action has left him skeptical that there will be a strong case for small-cap outperformance any time soon.
“We see higher rates as a clear deterrent to small caps, but we are skeptical that lower rates provide a comparable benefit – a key reason we remain overweight large caps,” Wilson wrote.
He added: “The economy is still expanding and S&P 500 earnings growth is finally reaccelerating again, led by large-cap, high-quality stocks.”
The heaviest AI trading
Bigger stocks are also gaining on the AI trade. Bespoke analyzed a group of AI ETFs to identify nearly 200 stocks that are frequently in indexes related to AI trading.
The team found that within these indexes, stocks with a market capitalization greater than $1 trillion had a combined average return of 41% this year, while those with a market capitalization less than $1 trillion gained just 0.42%. % year to date.
Notably, Apple (AAPL), Alphabet (Google, GOOG),Microsoft (MSFT), Amazon (AMZN), goal (GOAL) and Nvidia (NVDA) are the only US stocks with market caps above $1 trillion.
The story continues
“The early days of the AI boom were quite broad, but recently it has been mega-caps, driven primarily by NVIDIA (NVDA), that was the only game in town,” the Bespoke team wrote in its Monday note.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for in-depth analysis of the latest stock market news and events that move stock prices.
Read the latest financial and business news from Yahoo Finance