Global Market Overview – May 2023
Over May, there has been mega cap tech, and the rest. NVIDIA has been at the front of this as the GPU producer beat earning expectations and rallied 30% to (briefly) become a $1trn company. The theme of mega cap tech propping up the world feels familiar, especially since 2020, but this year the narrowness of US stock performance has been even more extreme.
Here are a few ways of breaking that down:
S&P equal weighted index versus the standard (market-cap weighted) S&P 500
The S&P 500 weighted by market cap has outperformed its equal-weighted equivalent by around 12% since the start of the year – far more than it did through the whole of 2020. This means that, more so than any year since 2000, positive S&P 500 performance has been driven by a small number of stocks.
The five-firm concentration ratio of the S&P
This chart shows the market cap of the 5 largest companies in the S&P divided by the total market cap of the S&P. What you can see is that, even after the sell-off in 2022, the S&P is still much more dominated by a few giants than it has tended to be in the past.
The argument can be made that the largest companies in the world justify these prices and relative dominance as valuations are not completely out of the ordinary and tech will no doubt shape our futures. But regardless of your view on valuations, you should absolutely be aware of the unwanted consequences of concentration.
The main one of these is that you have less diversification. S&P index investors have a higher percentage of their money in a smaller number of companies, most of which are in the same general industry – tech – meaning their share prices often react similarly to economic events.
The Biggest Single Driver of Monthly Moves
Getting more granular, we can look at how much NVIDIA alone has contributed over the month of May. The table below shows the single stock that has had the largest individual contribution to the S&P each month since the start of the year.
The data point is calculated as percentage change in share price multiplied by weight in index, divided by percentage change in index
What this shows is that (a) big tech has been running the show this year, and (b) NVIDIA has really shot the lights out during May, accounting for most of the S&P’s performance. The S&P’s performance in May has been incredibly narrow.
Over the next twelve months, we think that the global economy will slide into recession. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• Inflation will come down. Goods inflation is slowly normalising, and supply chain pressures are easing.
• Central banks are getting close to the end of their hiking cycles, but there is still a bit more work to do.
• A US recession is highly likely. Most leading indicators point towards a recession, but the recession shouldn’t be too long or deep.
And so, investors are starting to worry about what’s next for financial markets. Economic data isn’t likely to stabilise until next year, so ‘sideways with volatility’ is the most likely scenario for the next few months.
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited