Mega cap tech shares give ‘false sense of security’

Investors should not look for signs of recession in S&P 500, based on the performance of  ‘big seven’ tech stocks which give overly upbeat sentiment, leading investors into a false sense of security that the US economy could escape recession.

Talaria Asset Management co-chief investment officer, Hugh Selby-Smith, warned that investors should be more even more cautious about overlying on the performance of the big tech stocks (Apple, Microsoft, nVidia, Amazon, Tesla, Alphabet and Meta) when formulating their views on the market strength.

Instead, she said, investors looking to the stock market for clues about the direction of economic growth should be more rational and pay more attention to sectors such as financials, materials, and energy.

“These sectors traditionally underperform into a recession and have underperformed year-to-date. In philosophy, there is the concept of a category error. This is where properties are mistakenly attributed to one category when they belong to another,” Selby-Smith noted.

The ‘big seven’ tech stocks have delivered 13.2 points of return so far this year, while the rest of the S&P 500 has delivered just 2.7 points.

“In terms of contribution to returns from the S&P 500, the big seven have put all the other stocks in the shade,” Talaria’s CIO added.

“This may be lulling investors into a false sense of security that the US has avoided a recession and that equity markets are recovering.  A closer analysis of the index gives a more sobering picture.”

She also warned that the strength in the big seven stocks highlighted a major disconnect between the rising S&P 500 and the still falling composite leading economic indicators (LEIs), a situation that also took place before the Global Financial Crisis (GFC).

While tech stocks were helped by more positive forecasts and excitement around artificial intelligence (AI), Selby-Smith said she would be surprised if the LEIs begin to move up again soon when the lagged impact of monetary tightening was still ahead.

“When unemployment is low, real wages are negative, bank lending standards are tightening, and the cost of borrowing is rising,” she said.

“Further, there will be no incremental contribution from fiscal spending for the next two years because of the debt ceiling deal. Anything can happen, but the likelihood of a rally in LEIs is small.”