(Elerium/E+/Getty Images)
Blue chip stocks have long been synonymous with stability and reliability. Named for the most valuable poker chips, these stocks supposedly represent the crème de la crème of the corporate world, companies like Disney, General Motors and Verizon.
Known for their strong financial foundations, longevity, and a healthy flow of dividends, blue chip stocks have long been the go-to for investors seeking steady returns.
What's happening: But the dominance of blue chip stocks is coming undone, some analysts say, and the performance of the so-called magnificent seven — Tesla, Nvidia, Apple, Amazon, Alphabet, Microsoft and Meta — could be hiding some fairly bad market fundamentals.
"While major US equity indices are now back to all-time highs, not everything has been working in the market lately," wrote analysts at Bespoke Investment Group in a recent note to clients.
"The S&P 100 is made up of the largest publicly-traded stocks in the US, and while the mega-caps like Apple, Microsoft, and Nvidia have been driving this blue-chip index higher, there are other names in the index that have been left behind over the last few years," they said.
The magnificent seven stocks, largely driven higher by expectations of a boom in artificial intelligence, make up well over a quarter of the value of the S&P 500 and about half of the Nasdaq 100. Their values have surged so high that they've been buoying the broader market even as many blue chips have struggled.
As of mid-January, Nvidia and Microsoft alone accounted for about 75% of the S&P 500's gains this year, according to analysts at Bespoke. The 20 largest stocks in the index, they found, made up 110% of the index's gains, while the remaining 480 were acting as a drag.
Last year, the S&P 500 rose by just over 24%, but if you were to weigh each stock in the index equally, it would have gained just 11.6%.
A narrow rally doesn't necessarily mean a crash is coming. But it's largely Big Tech that's driving markets higher, and that concentration of gains in so few stocks carries inherent risk. "Those equity gains could prove vulnerable to a change in sentiment towards that group," wrote Henry Allen, a strategist at Deutsche Bank, in a note to clients last week.
Plus, with the growth in popularity of exchange-traded fund investing over the past decade, investors have turned away from single, safe haven stocks and into broad indexes. But these indexes are weighted, and so ETF investors end up owning a lot of Nvidia and Tesla and much less of Disney and General Motors.
Numbers don't lie: Disney has dropped by nearly 45% over the past three years. General Motors is down 34% and Verizon, Target, Pfizer, Nike and 3M have all fallen by more than 25% over the same period.
Charter Communications, the broadband connectivity company with more than 32 million customers and a market cap of more than $56 billion, has fallen by about 43% since 2021.
The problem is that despite being included in blue chip ETF indexes, companies like Nvidia and Tesla aren't truly blue chip stocks, George Pearkes, an analyst at Bespoke, told CNN. They're much more volatile.
Tesla, for example, is down about 23% so far this year. Nvidia, meanwhile, is up about 30%. Neither of those are tracking the broader market — the S&P 500 is about 3.3% higher so far this year.
Yes, but: There are other reasons that blue chips could be losing steam.
Established, giant companies tend to be more vulnerable to macroeconomic shifts. Geopolitical tensions, high prices and consumer worries can disproportionately hurt these multinational mega-brands, making them more susceptible to factors beyond their immediate control. The size and maturity of some of these companies might also imply that there's less room for expansion – especially in the rapidly evolving artificial intelligence sector.
But as the magnificent seven stocks grow larger and larger, they do appear to be taking oxygen away from other parts of the market.
Comments
Post a Comment