S&P 500 at record highs but what is the advance decline ratio on NYSE suggesting?

The weightage of IT sector stocks is steadily seen increasing in the S&P 500 index.

S&P 500 index that tracks the performance of the largest 500 companies in the US gained by 1.1 percent to close at 4,958.61, thereby making a record high on February 2.

While closing higher by more than 1 percent is not something investors have not seen before, this is only the second day in 62 years when the S&P 500 jumped 1 percent on a day when there were two losers for every winner on the NYSE exchange.

The other was the day after 'Black Monday' -- a reference to the unexpected massive crash of stock markets on October 19, 1987.

Dow Jones Industrial Average (DJIA) dropped by 22.67 percent and S&P 500 index declined by 20.4 percent on the historic day. It was the biggest decline in a single day in the history of the US markets. The markets eventually saw fast recovery with DJIA recovering more than 500 points within a week.

IT stocks dominated the S&P 500 gains nudging the index to record highs. This indicated that the AI- powered tech boom is at play in market for 2024 as well. The tech companies contributed to around 70 percent of the S&P 500 gains in 2023. The IT sector portion of the S&P 500 index gained 57.8 percent when S&P 500 clocked gains of around 26 percent in 2023. Almost 75 percent of the S&P 500 index constituents underperformed in 2023, highlighting the dominance of the IT sector.

The weightage of IT sector stocks is steadily seen increasing in the S&P 500 index. It stands at around 27 percent, highest for any single industry. The top 10 companies out of which 7 are technology related, constitute nearly 38 percent of the total market capitalisation of S&P 500 index which stands at $41.128 trillion. The biggest 10 index constituents by market capitalisation made up to 31 percent of the index market capitalisation as on August 31 , 2023.

The outsized performance of the IT sector stocks and especially the ‘Magnificent seven stocks’ is responsible for the increase in the IT sector weightage in the index. Nvidia shares jumped higher by more than 213 percent in the past one year.

Magnificent seven stocks includes Meta, Tesla , Amazon, Alphabet, Apple, Microsoft and Nvidia.

History was created when the shares of Meta (formerly Facebook) jumped higher by 20 percent adding $204.5 billion to its market capitalisation in a single day. Before this, the biggest single day valuation gain record belonged to Amazon when it added $191.3 billion in February 2022. Meta Inc announced dividends for the first time and also declared a stock buy-back plan worth $50 billion, adding to the optimism.

According to Rama Ratnam, Director and CIO, Centrum International Services Pte Limited, “The jump in S&P 500 index is mainly on good earnings of most mega cap technology companies barring Apple and Google which constitute a major portion in the top 10 highest weighted companies in the index. The main reason for the optimism in the big tech companies is the perceived high growth in the tech portion of the S&P 500 index versus slow growth for the others.”

The reason behind the market rally, apart from the earnings growth, is the strong economic data, experts said. In such a scenario, few are preferring to trade in strong economy with lower rate cut possibility than with higher rate cut possibility and poor economic growth, they pointed out.

The strong economic data is leading to higher probability of soft landing which is a positive outcome for the markets, some experts believe. The recent jump in the yield on the 10 year Treasury note in US was not high enough to stop the equity market from rallying as MSCI World Index made record highs along with S&P 500 index.

It is not surprising given the mega market capitalisation combined with the growth performance of big tech companies and increased index weightage that we see the indices making new highs even as the advance decline ratio continues to be in favor of the declines while other sectors fail to deliver growth.

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