Image shows a bustling cityscape with skyscrapers and highways, with an overlay of computer screen images and apps representing technology use and connections.

While the U.S. stock market flounders near record highs, one pocket of equities has already closed the deal: technology stocks.

The Nasdaq 100 Index, a technology-heavy group of stocks, has closed at six all-time highs since the market bottomed in March. It’s a success story that isn’t terribly surprising given societal trends these days, but we’re wondering if technology’s run could be masking some troubling trends in market health. On Monday and Tuesday, the Nasdaq 100 reached record highs as the S&P 500 closed 7% below its own record, the widest divergence between the two gauges since February 2000 (in the tech bubble days).

Technology leading the market higher isn’t anything new, and we’re generally optimistic about the sector’s prospects over the next few years. But you can’t judge a market by its biggest securities, just like you can’t judge a book by its cover.

Chart shows tech stock performance from the Nasdaq 100 Index (which focuses on technology stocks) compared with the S&P 500 Index from January 1 – June 25, 2020. The Nasdaq 100 has continued to outperform the S&P 500 throughout the year. The Nasdaq 100 fell 28% from February 19 to March 23, compared to the S&P 500’s 34% slide. Since then, the Nasdaq 100 has jumped more than 40%, closing at its first fresh new high on June 5.

The Comfort Zone

Technology stocks have had a stellar track record over the past several years thanks to society’s shift to online, mobile devices, and the cloud. From March 2009 to February 2020 (the last bull market), the Nasdaq 100 rose more than 800%, while the S&P 500 climbed 400%. Technology’s popularity even led to the rise of a small group of super-stars called the “FAANG” stocks — Facebook, Amazon, Apple, Netflix and Alphabet (Google).

This year, technology stocks have outperformed the broader market on the way down and up. The Nasdaq 100 fell 28% from February 19 to March 23, compared to the S&P 500’s 34% slide. Since then, the Nasdaq 100 has jumped more than 40%, closing at its first fresh new high on June 5.
To be clear, there could be a compelling financial case for investing in technology companies right now. Technology companies are growth stocks that tend to benefit from low interest-rate environments. Lower interest rates boost the future value of sales and profits, which disproportionately benefits technology companies with higher growth prospects. The coronavirus pandemic also forced workplaces and consumers to find more tech-savvy solutions during quarantine, a trend that could boost growth in the space even more. Several technology-driven companies talked about the acceleration of technology in their recent quarterly earnings. Microsoft’s CEO, Satya Nadella, said on an earnings call in April that two years of digital transformation occurred in two months.

Investors have also more recently viewed technology shares as a source of stability in a world of uncertainty. It’s especially tough to predict winners and losers in today’s markets, so investors may flock to what they know and what has worked the best. We’d even go so far to think that investors have used technology as a “defensive” sector to hide out in until the macroeconomic environment calms down.

Thinning Leadership

Technology stocks’ success has been a bright spot after an especially fierce bear market. If you just look at the Nasdaq 100, you’d think the stock market is chugging along just fine. The Nasdaq 100 is up 5.7% month-to-date (through June 25), and the FAANG stocks are up 8.8% over that same period. Even though stocks stumbled a little on June 24, tech stocks are still about 1% away from posting another record high.

Take technology out of the picture, though, and the stock market looks a little different. The S&P 500 is up 1.3% month-to-date (through June 25), but has struggled to push higher as it moves towards its previous peak.

The chart shows the S&P 500 sector returns as of June 25, 2020, as follows: Utilities (-6.1%), Healthcare (-3.9%), Energy (-1.4%), Consumer Staples (-1.3%), Real Estate (-0.4%), Materials (-0.1%), Industrials (-0.1%), Communication Services (0.7%), S&P 500 (1.3%), Financials (1.4%), Consumer Discretionary (4.2%) and Information Technology (6.0%).

Just four S&P 500 sectors have risen month-to-date: information technology, consumer discretionary, financial and communications services stocks. While these sectors account for about 60% of the S&P 500’s entire market value, the pool of market leaders has thinned since May’s more broad-based performance. Traditional defensive sectors, like utilities and health care, have lagged in June. Don’t get us wrong: we’re happy to see more growth-oriented stocks excelling, as that’s a good sign for long-term market prospects. But the rally’s foundation is showing signs of crumbling, and that could be a big reason why the S&P 500 is running in place.

The same story is evident on a single-stock level. Investors have been eyeing the S&P 500’s 200-day moving average (around 3,020) as a technical line in the sand for the health of this rally. So far, so good: the broader index has closed above that level for 10 straight trading days. However, on Thursday, only 39% of S&P 500 stocks closed above their 200-day moving averages, even though the S&P 500 closed 2.1% above its own 200-day moving average. Even though the broader index is staying afloat, many of its constituents are sinking.

Crossing the Finish Line

For technology stocks, the bear market is in the rear-view mirror and they’ve left the rest of the market in the dust. In some ways, this has been the story of the past decade as technology has seeped into our daily lives. But in these days of uncertainty, we may need to see some strength beyond technology before the S&P 500 crosses its own recovery finish line.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
 


Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.