Cracks have started to appear in some of the market leaders, with Facebook Inc suffering the largest one-day loss of value on record on Thursday. Meanwhile, the median stock in the S&P 500 Index is further from its 52-week high than the benchmark US gauge as a whole – signalling narrowing breadth – though this metric hasn’t yet reached levels that would “trigger alarm,” the strategist says. But these fears of a top-heavy market ignore what’s going on with Corporate America’s bottom line: broad-based strength in profit growth, according to Goldman.
“Usually, these narrow bull markets eventually led to large drawdowns when investors lost confidence in the increasingly expensive handful of crowded market leaders,” writes Kostin. “In the past, most instances of rising market cap concentration among a handful of stocks corresponded with an increase in earnings concentration as well,” he adds. “Unlike past episodes of narrow market breadth, the earnings environment today appears healthy and broad-based.” The largest stocks in the S&P 500 Index don’t account for an outsized portion of total earnings, and consensus estimates imply that profit growth for the median stock will exceed that of the index average.
Concerns about the future of cross-border commerce and the outlook for global growth are preventing more stocks from joining the rally in earnest, the strategist reckons. Nonetheless, the market resilience in the face of Facebook’s softness means Goldman Sachs has a preference for technology and growth stocks – even as competitors at Bank of America say it’s time to short. To be sure, the purported dearth of advancing issues is also up for debate.
“A rally that is thin is one where just a handful of stocks are participating in the market’s gains, while the rest of the market languishes,” writes Bespoke Investment Group. “Today’s market is nothing even close to resembling that.” The S&P 500 Equal-Weight Index is up 3.7% this year, only modestly trailing the market-cap weighted gauge’s 5.4% advance, suggesting a rally more broad-based than Goldman clients might realise. “This isn’t only relevant to US investors,” adds Nicholas Colas, co-founder of DataTrek Research. “Chop up various all-world equity indices from MSCI and others and you will find US large-cap Tech is the only reason global stocks are positive on the year.”
Sources and photo-credits: Bloomberg, Gulf Times