Soundings

On October 6th, the S&P 500 Index notched a new peak. But all is not as it might seem on the surface.

Through September 30th the S&P 500 Index annualized at 21.3% over the trailing three-year period. The run in U.S. large cap stocks has been extraordinary by almost all measures. Because the S&P 500 Index is capitalization weighted, the largest stocks in the index have the largest impact on performance. Adjusting for capitalization, the S&P 500 Equal Weight Index – which assigns the same weight to each constituent – annualized at just 13.6% over the same trailing three-year period.

The ten largest stocks in the Index, which include the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), accounted for 39% of the index at month end.

Strength at the top can mask a lot of weakness elsewhere. As the month of September drew to a close, more than 50% of S&P 500 constituent stocks were trading below their 200-day average.

Historically, smaller companies have tended to be more sensitive to interest rates. The Artificial Intelligence build out has thus far been rate insensitive. Ordinarily, higher rates slow investment, helping the Federal Reserve to restrain inflation. In the current cycle, the hyperscalers (see names above) have continued to raise capital and invest heavily. That demand for capital may put upward pressure on borrowing costs for other sectors and companies, while the scale of the buildout may add to inflationary pressures. For now, there is little evidence that this borrowing or spending is poised to slow.

None of this means the market leaders cannot continue to lead. But when a new high rests on fewer and fewer stocks, and the spending sustaining that leadership remains largely insulated from higher rates, the index can overstate the health of the market beneath it. Behind the headline, breadth is writing a more cautious story.

Tide Cycle Resources (Tide Cycle) is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. A copy of Tide Cycle’s Forms ADV Part 2 and Form CRS are available without charge upon request. The opinions expressed are those of Tide Cycle. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. This should not be taken as specific investment advice. We recommend consulting an investment/tax professional before making financial decisions based on any information provided.

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