Large-cap stocks are clearly leading the stock market rally in 2024.
Bespoke Investment Group recently broke down the year-to-date performance of the S&P 500 (^GSPC) into 10 baskets of 50 stocks sorted by market cap size: The top 10% of the top 50 stocks in the index were the only subsector to outperform the S&P 500 as a whole this year.
For Bespoke, this illustrates recent trends in the market, generally: the smaller the stock, the weaker the returns.
The push into large-cap stocks comes as investors scale back expectations that the Federal Reserve will cut interest rates this year amid weak inflation reports.
In an environment where many expect interest rates to remain elevated for longer than initially expected, large-cap stocks have shown greater resilience to rising interest rates.
One reason is that large-cap stocks continue to post robust earnings growth: In the first quarter, a basket of stocks dubbed “mega-cap growth and tech stocks” grew 39% year-over-year, compared with 5.9% for the S&P 500, according to research by Binky Chadha, chief global strategist at Deutsche Bank. The mega-cap basket includes the “Magnificent Seven” tech stocks as well as other big names like Netflix (NFLX), Visa (V), and Adobe (ADBE).
That fundamental rationale has supported large-cap stocks at times of uncertainty about the interest-rate outlook and the trajectory of economic growth, while small-cap stocks have continued to underperform no matter how rates move.Morgan Stanley Chief Investment Officer Mike Wilson wrote in his weekly note to clients Sunday night that he’s skeptical that recent market trends provide a strong case for small-cap stocks to outperform anytime soon.
“While rising interest rates are a clear headwind for small-cap stocks, we are skeptical that falling rates will provide an equal benefit, which is our primary reason for continuing to emphasize large-cap stocks,” Wilson wrote.
He added, “The economy is still expanding and earnings growth in the S&P 500 is finally accelerating again, driven by large, high-quality stocks.”
Top-heavy AI industry
Big names are also winning with AI trading: Bespoke analyzed a group of AI ETFs and identified about 200 stocks that are frequently included in indexes linked to AI trading.
The researchers found that stocks in these indexes with market capitalizations over $1 trillion have returned an average of 41% combined this year, while stocks with market capitalizations under $1 trillion are up just 0.42% year to date.
Notably, there are only five U.S. stocks with market capitalizations over $1 trillion: Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA).
“While the early days of the AI ​​boom were fairly widespread, mega-caps, driven primarily by NVIDIA (NVDA), have become the only option these days,” the Bespoke team wrote in a note on Monday.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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