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7 Stocks Lead the Market Rally, While Phantom Rally Occurs in Defensive Stocks
Is the rally too thin to win?
Every bearish investor is scratching their head, wondering how the stock market isn’t sinking right now. Earnings are under pressure, interest rates remain high, inflation is sticky, a recession looms off in the distance, regional banks were (are?) failing — the list goes on and on.
Yet despite the issues, the market has been rallying.
As of April 20th, the Nasdaq is up more than 15% year to date, while the S&P 500 is up 7.6%. The Dow and the Russell are less impressive, but are still up on the year as well.
Despite the big gains, there are a lot of cross-currents in the markets.
The “don’t fight the trend” crowd is at odds with the “don’t fight the Fed” group. The former is bullish and the latter is bearish — and that’s only when we consider equity prices.
Bonds, yields and other assets continue to send mixed signals as well. But when we pull back the curtain on the S&P 500, we see the reality of what’s at play.
According to Forbes, just seven — yes, seven! — stocks are responsible for 88% of the index’s gains.
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Let’s Look at the Stats for the S&P 500
So what are the seven stocks leading the charge?
Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta (META), Nvidia (NVDA) and Tesla (TSLA).
In other words, those are the four largest companies in the S&P 500 — AAPL, MSFT, AMZN, GOOGL — and seven of the top eight.
AAPL — $2.65T
MSFT — $2.15T
GOOGL — $1.35T
AMZN — $1.07T
NVDA — $690B
TSLA — $575B
META — $560B
The top four names account for $7.22 trillion in combined market cap. All seven combine for over $9 trillion in market cap. That accounts for more than one-quarter of the S&P 500’s total market cap of $34.67 trillion.
How Strong Is the Rally in the S&P 500?
Okay, now that we’ve got the stats out the way, what does it mean exactly?
I’m not one to fight the trend and for good reason. We already know the long-term trend for the S&P 500 favors the bulls — in fact, it heavily favors the bulls — so when stocks are rallying, it simply looks like it’s the long-term trend at work.
Given the backdrop of all the negatives though, it does cause even the bulls to wonder if they are skating on thin ice. The “thinness” of the rally only adds to the second-guessing.
Regarding the current rally, we have an S&P 500 that remains in an incredibly tight range. If we lose the leadership of these seven stocks, what’s left to prop up the index?
We’ve already seen Netflix and Tesla disappoint on earnings. The latter is down about 10% since reporting on April 19th and is now trying to avoid a fourth straight weekly decline.
With Microsoft, Meta, Amazon and Alphabet earnings due up this week, five out the seven market leaders will have reported before the end of April. So given that, we should get a very good look at how the markets will react going forward.
It Remains a Stock Picker’s Market
There’s one other thing to note. If tech falters, it would have to be one heck of a rotation to keep the indices afloat, but it’s possible as we see funds flow into other groups of stocks.
Early this month, we noted the strength in defensive stocks, like Procter & Gamble (PG), Coca-Cola (KO), PepsiCo (PEP), General Mills (GIS), the Consumer Staples Select Sector SPDR Fund (XLP), McDonald’s (MCD) and others. So far, those names continue to trade well.
The healthcare group continues to act well too. We were lucky to snag positions in a handful of these stocks, including AbbVie (ABBV), Cardinal Health (CAH), Eli Lilly (LLY) — the most impressive one — as well as the Health Care Select Sector SPDR Fund (XLV).
I’m not sure how long this strength will last, but it’s there for now.
On the surface, it is a tad concerning to see “risk-on” stocks like the Russell and ARKK struggle, while defensive stalwarts like KO, PG and MCD continue to trade so well. However, that’s the market we have right now.
The Bottom Line
Right now, we have a market where traders must identify the winners and ride the winners until they’re too tired to go on. Then we need to find new winners and repeat the process.
At least, that is the plan until the broader market starts to show a better trend — regardless of direction — because the idle chop it’s going through makes it harder to be anything more than a scalper.
The Bottom Line: Keep an eye on those seven stocks — AAPL, MSFT, TSLA, NVDA, AMZN, GOOGL and META — for an implication on the S&P 500.
So goes mega-cap tech, so goes the market…for now.