Will the structural imbalance of the S & P 500 become a major narrative. There are six companies with over $1 trillion or more in market cap, two of which are worth more than $3 trillion. NVDA is now the fourth largest company in the S & P 500, eclipsing AMZN and the $1 trillion hurdle the other day. NVDA is worth more than entire Chinese market.
MSFT and APPL are both worth more than two times the S & P 500 oil sector.
The combined values of the six companies inferred above are worth more than the combined capitalization the Canadian, the UK and Japanese markets.
Bloomberg writes these six companies above are worth about 29% of the S & P 500 but only generate 20% of its earnings, a metric that is unsustainable.
Considerably more can be written on this topic as companies are valued by expected earnings discounted by some interest rate. And as these market caps go higher, led by higher multiples, so does risk. And that risk is no longer just about “big tech” or a select few companies; it has become the risk of the index at large.
Passive investing is now close to 55% of the market capitalization according to Bloomberg. By definition, there is no price discovery via indexing. The incoming monies are allocated based upon size.
What happens if fund flows reverse? Tuesday was the largest drop in the S & P 500 since March 2022. Bloomberg writes the “typical stock outperformed by a considerable margin at the expense of the indices.”
Commenting on the data, retail sales and factory production pointed to a loss in momentum—though not necessarily signaled a significant deterioration in the economy. Home building sentiment reached a six-month high and jobless claims declined. Increases in both import and export prices were greater than expected.
Equities were again bifurcated. The Dow advanced about 0.91% while the NASDAQ was up 0.20%. Treasury yields were lower across the curve. Oil rose on increased Middle East tensions.
Today the PPI, building permits and a sentiment indicator are released. How will the markets interpret the data?
Last night the foreign markets were up. London was up 1.11%, Paris up 0.56% and Frankfurt up 0.72%. China was closed for a holiday, Japan up 0.86% and Hang Seng up 2.46%. Dow and NASDAQ futures are flat and up 0.35% ahead of the PPI. The 10-year is off 7/32 to yield 4.26%.
