Mega cap stocks are hitting a ‘2020 moment’

Mega cap stocks are hitting a ‘2020 moment’

Equities 3 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  The strong gains this year in US equities have been driven by mainly three sectors related to technology and the generative AI hype. The equity rally has pushed mega caps to relative performance of S&P 500 to S&P 500 Equal Weight to highs not seen since 2020. This strong relative outperformance in less than a year should make investors reducing their expectation of more outperformance for mega caps. It might be worth for investor considering the broader market as 2024 approaches.


Is the technology sector a blessing or curse for US equity market?

The generative AI hype cycle in 2023 has had elements of tangible success in the case of Nvidia and then also a lot of hope for the future that is yet to materialize. The combination of generative AI hype and no recession in the US have made equity markets shrugging off any concerns related to the brewing banking crisis in March, a weak Chinese economy, and a recent rally in interest rates. The result is S&P 500 up 18.8% this year driven mainly by three sectors (communication services +50.7%, information technology +50.4%, and consumer discretionary +32.7%). In those three sectors we find most of the mega caps (companies with market value above $200bn) and as a result of this year’s rally, the ‘Magnificent Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) has increased their relative index weight in the S&P 500 Index.

The information technology sector has now reached a 29% index weight in the S&P 500. On the one hand, it has been a blessing for equity returns and flows into US equities, but on the other hand it is also a curse, as it makes the US equity market more fragile. As the chart below shows, the S&P 500 has reached a relative level to the S&P 500 Equal Weight not seen since 2020 reflecting strong sentiment in technology stocks and more generally mega caps. The relative outperformance has also been stronger than in the past. As a result it makes sense to begin moderating expectations for these mega caps relative to the rest of the market.

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