Mega-cap stocks are trouncing smaller stocks

Nvidia and a few other mega-cap tech stocks have skyrocketed, driving indices higher, but most stocks have stagnated.

Stocktake has commented on this phenomenon multiple times in recent weeks but it bears repeating because, as Bespoke Investment notes, the performance disparity between the mega-caps and everyone else “can’t be overstated”. In a recent three-month period, the seven largest S&P 500 stocks soared 32.8 per cent, but the seven smallest stocks fell 35 per cent. The 50 biggest stocks gained 11.8 per cent, but the smallest 50 stocks were down 11.4 per cent.

The S&P 100, which consists of the 100 largest stocks, is trouncing the broader S&P 500.

The current performance differential “ranks among the most extreme readings” in history, says Bespoke.

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Is the lack of participation in the rally suggestive of future weakness? Or will the smaller companies eventually get motoring? Bespoke could find only five previous instances that mirrored the current situation. Six and 12 months later, the S&P 500 outperformed the S&P 100 on all but one occasion.

One can’t read too much into such a small sample size, but it might comfort investors concerned about the narrowness of the rally. It seems most stocks eventually join the party. As Bespoke puts it, “everybody eventually gets a trophy”.