Market cap concentration could signal turning point: Antipodes

The percentage of stocks outperforming the S&P 500 has never been so narrow and is dominated by tech stocks, which could lead to outperformance from lower stocks, according to Antipodes.

Around 85% of the move in the S&P 500 was explained by just five stocks: Facebook, Apple, Amazon, Alphabet and Microsoft.

Jacob Mitchell, Antipodes Partners’ chief investment officer, said these market extremes had historically signalled a turning point where less popular, lower multiple market losers began to outperform the current winners.

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“Given the global pandemic that has been sending shock waves through economies in the past months, it’s astounding to see that this US led market cap concentration has surpassed the previous historical highs seen during the dot-com bubble,” Mitchell said.

“With acceleration in technological disruption and hits to business confidence, it’s no surprise that today, lower multiple losers are characterised by the more economically sensitive or cyclical parts of the market.

“The question investors might ask is: even with the continuation of long-term disruption, is now the right time to be buying into the secular growth or defensive part of the market?”

Mitchell said it could be argued that cyclicals had priced in the end of the industrial era and tomorrow’s market leaders were most likely to be misunderstood cyclicals.

“Admittedly, outperformance from these stocks will require a change in the current narrow narrative as economies cyclically recover and stimulus switches from income protection to investment, with China and Europe leading this with de–carbonisation, EV [electric vehicle] and 5G adoption,” Mitchell said.

“Don’t just buy a cyclical because it’s on a low multiple. Within this broad group look for great businesses, attractively priced with embedded growth opportunities that the market is currently overlooking.”

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