US stocks are poised for the best August since 1986, after the sharp technology-dominated rally since March sent blue-chips to a record high.

The S&P 500 index is up 6.8 per cent for the month and if the gains hold until trading closes on Monday, that would mark the best August since the index’s 7.1 per cent advance 34 years ago.

The bumper month caps a strong recovery since late March that has added 56 per cent to the value of the biggest US stocks, fuelled by aggressive fiscal and monetary stimulus.

The August run reflects the “ample and predictable [central bank] liquidity that brings in more money to the marketplace,” said Mohamed El-Erian, chief economic adviser for Allianz. “All investors care about is liquidity right now.”

Bar chart of S&P 500 August performance (%) showing US stocks on pace for best August since 1986

The outlook for corporate profits has also begun to improve. Earnings on a per share basis for the S&P 500 fell by a third in the second quarter — a grim reading but still stronger than strategists had predicted. Since then, some analysts, including those at Goldman Sachs, have raised their profit forecasts for the year.

The biggest winners for the month include those hit hardest by the coronavirus pandemic. MGM Resorts, which owns the Bellagio hotel in Las Vegas, is up 44 per cent so far in August, while cruise operators Royal Caribbean and Norwegian, and airline Delta have also climbed by more than a fifth.

Apple, the largest stock in the S&P 500, has been the biggest contributor to the market’s gains this month and is up 18 per cent in August. The company surpassed $2tn in market value for the first time earlier in the month.

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The iPhone maker is joined at the top by Microsoft, Amazon, Alphabet and Facebook, which together make up more than a fifth of the S&P 500 and have accounted for nearly a third of the gains since the recent rally began.

Line chart of Rebased showing Top five stocks trounce broader market

The soaring value of these tech-focused giants is supported by rising profits, although the concentration will probably abate, said Liz Ann Sonders, chief investment strategist for Charles Schwab. “Right now the top five represent their own quartile of the S&P 500 — that doesn’t go on ad infinitum,” she said.

Despite the new high in the S&P 500, most companies in the index remain below the levels they achieved at the previous market peak in February. The gap between the winners and losers since then has led some investors to describe the rally as “K-shaped”.

There is a “bifurcation” in the market, said Grant Bowers, an equity portfolio manager at Franklin Templeton, as trends towards online shopping and working from home have strengthened, supporting stock prices for software and ecommerce groups. Such gains should spread to other sectors before long, he said.

“The big [tech] stocks are truly benefiting from this but a number of other companies from health and consumer [focused companies] are posed to benefit from these shifts.”

Via Financial Times