US stocks this week hit a record high, clawing back the losses inflicted by the coronavirus pandemic. But most of the companies in the benchmark S&P 500 index had nothing much to celebrate.

The US stock market’s advance this year has been propelled by some of the largest companies in America, including the likes of Apple and Amazon. While those tech giants have notched up a string of new highs alongside companies that have benefited from the viral outbreak — groups such as pizza chain Domino’s and soap maker Colgate-Palmolive — the majority of companies in the index are still down on where they were.

Share prices of a fifth of S&P 500 companies were more than 50 per cent below their all-time highs on Friday. The average stock in the index is 28.4 per cent below its peak, according to Cornerstone Macro, a research group.

The divergence has stoked concerns that the eye-catching rallies in the S&P 500 and the technology-heavy Nasdaq Composite are masking big strains on businesses across the country. 

“This is really about a handful of stocks — not at all representing what is going on underneath the surface,” said Michael Kantrowitz, an analyst at Cornerstone.

The gap between winners and losers since the pandemic struck has led some investors to describe the rebound as “K-shaped”, evoking a swift fall followed by a big divide in fortunes.

Line chart showing SP500 sector performance since February 19

“The K-shaped recovery delineates between the haves and have-nots — the portions of the economy that do well with the Covid backdrop,” said Michael Mullaney, global head of research for Boston Partners, a fund manager.

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Just three sectors have outpaced the S&P 500 so far this year. Technology shares are up 27 per cent in 2020, followed by a 23 per cent gain by consumer discretionary stocks. 

But even in the consumer area, the move higher is attributable mainly to one company: Amazon. The ecommerce platform, which is up 78 per cent this year, accounts for 43 per cent of the consumer discretionary index. Its rise helped offset declines by more than half of the other companies in the same sector, including cruise operator Carnival and preppy-style clothing mainstay Ralph Lauren, which have both dropped more than 40 per cent.

“People have gotten so used to talking about markets in a monolithic way,” said Katie Koch, the co-head of equities at Goldman Sachs Asset Management. “When we say ‘this sector is up’ and ‘that sector is down’, because of this concentration in markets, it is often an idiosyncratic move.”

The dominance of titans like Apple and Microsoft means “the tremendous equity market rally will remain vulnerable to the performance of a handful of companies”, said Seema Shah, chief strategist for Principal Global Investors. “Big tech will need to continue delivering.”

Apple, Microsoft, Amazon, Alphabet and Facebook, the top five companies in the S&P 500, account for more than a quarter of the rally since late March and each reached new highs in August.

The quintet now has a market capitalisation of $7tn — more than the entire Japanese Topix index of about 2,170 companies, according to Bloomberg.

Apple is up 60 per cent for the year and last month won back its crown as the world’s largest listed company from Saudi Aramco, the oil group. The iPhone maker’s $2tn equity value makes it bigger than the bottom third of companies in the S&P 500 combined.

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“The discussion du jour is ‘are we in bubble territory?’,” said Lee Spelman, head of US equity for JPMorgan Asset Management, drawing parallels with the dotcom boom, when companies with tiny revenues sometimes soared to huge valuations. “What happened in 2000 was the promise of what was going to be, but [now] these companies are generating cash flow and profits — they are real businesses.”

The divergence in the market has been reflected in the outperformance of high-growth stocks over so-called value companies, trading at low multiples of profits. The S&P 500 growth index has gained 11 per cent while its value counterpart has fallen 13 per cent from the previous peak in February. Companies in the financial industry, which mostly fall into the value bucket, have been hit hard by rising provisions for losses on loans and the fall in interest rates, which typically squeezes revenue.

Line chart of Rebased from February 19 peak showing Growth stocks trounce value

Rob Almeida, global investment strategist for MFS Investment Management, the Boston-based fund house, said the tech companies were not the principal concern in today’s market because they have safe profit streams that can be worth paying up for.

Instead, he worries about companies that loaded up on debt before and after the downturn but may struggle to service those borrowings.

“I’d rather own an expensive asset with some level of cash flow surety going into a down market than owning something cheap with cash flow uncertainty,” Mr Almeida said. “If the cash flow isn’t there, as you saw in 2008, valuation doesn’t matter. That asset is going to zero.”

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Via Financial Times