Below are some of the most interesting articles, quotes and charts I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
As noted here last week, very rarely have we seen the stock market leadership narrow to such a degree as it has recently. And the precedents didn’t end well.
Even if the broader market catches up to the mega caps, that doesn’t tell us whether they will outperform. We are living in one of the narrowest markets in history, with only 26% of stocks outperforming the index. The last time this happened (1998-2000) it all ended in tears… pic.twitter.com/J8UKBQgenV
— Jurrien Timmer (@TimmerFidelity) February 1, 2024
Driving these episodes is typically some sort of “big market delusion,” as Rob Arnott phrases it.
"Narratives have the advantage of being largely true and the disadvantage of being entirely reflected in current share prices. So betting on a narrative is a useless way to invest." https://t.co/gjJrvb6Dgq pic.twitter.com/pVlQEUMts4
— Jesse Felder (@jessefelder) January 31, 2024
And that delusion has created quite a significant disconnect between the prices of big tech stocks and their earnings.
The pressure on tech companies to satisfy high expectations this earnings season is pretty intense. The spread between tech sector earnings share of the S&P 500 and sector weight share is even higher than it was in 2021. pic.twitter.com/U0eRFF6RDC
— Gina Martin Adams (@GinaMartinAdams) January 27, 2024
But there is reason to believe that reality may soon set in.
'In the decades to come, 2023 may be remembered as the year of generative AI hype, where expectations of AI-powered riches became commonplace. The year 2024 will be the time for recalibrating expectations.' https://t.co/RSCpsqUMmq
— Jesse Felder (@jessefelder) January 28, 2024
If so, stock market volatility could come back with a vengeance.
NEW ODD LOTS:
The 'Short Vol' Trade Is Back And Bigger Than Ever@tracyalloway and I had a great time bringing @Ksidiii back onto the show to discuss the explosion money into funds betting on low/declining volatility and what that's doing to the market. https://t.co/cbdiBhZmi9
— Joe Weisenthal (@TheStalwart) January 29, 2024