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The Tech Stock Rally Leaves Small Caps In The Dust

May 28, 2023
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Large-cap stocks are currently outpacing their smaller counterparts, showcasing a notable performance disparity. According to Dow Jones Market Data, the Russell 1000 index, representing large companies, has surged 9.2% this year, significantly surpassing the modest 0.7% gain of the small-cap concentrated Russell 2000. This year's outperformance is the widest since 1997, examining years in which the Russell 1000 remained in positive territory through May 26.

The impressive gains in the large-cap index can be largely attributed to a handful of prominent technology stocks. Facebook parent Meta Platforms and graphics chip maker Nvidia have both witnessed their value more than double in 2023. Additionally, Tesla has seen a remarkable increase of 57%, while Apple has climbed 35%.

On the other hand, the small-cap index has encountered pressure, partially driven by substantial declines in regional bank stocks. Valley National Bancorp has experienced a decline of 32%, while Independent Bank (Massachusetts) has dropped by 46%. Moreover, the academic learning platform Chegg has suffered a 1.29% decrease, and oil-and-gas-drilling company Helmerich & Payne has fallen 34%.

Investors have turned to large-cap tech stocks as a preferred trade due to concerns regarding the debt ceiling, potential recession, and persistent inflation. However, some investors express caution, questioning the sustainability of the stock market rally if any of the market's dominant players were to encounter setbacks. George Patterson, chief investment officer at PGIM Quantitative Solutions, states, "Trees don't grow to the sky. It's hard to imagine how they grow from here." He emphasizes the importance of addressing the question of what large-cap tech companies will do with their substantial cash reserves.

Apple and Microsoft continue to exert significant influence over major stock indexes, with their combined weighting in the Russell 1000 reaching a record-high level of approximately 13%, according to Strategas Securities data dating back to 1995. In the upcoming holiday-shortened trading week, investors will closely analyze the jobs report on Friday and review the Federal Reserve's compilation of economic anecdotes known as the beige book, scheduled for release on Wednesday.

Tech stocks have emerged as a safe haven during times of crisis, as demonstrated during the March banking crisis. Investors anticipated that the collapse of three regional banks would compel the Federal Reserve to pause its efforts to raise interest rates. Lower rates enhance the appeal of growth companies, particularly in the tech sector, which have the potential to generate substantial profits in the long term.

Investors highlight the robust financial positions of many tech companies, equipping them to withstand economic downturns. Conversely, concerns arise regarding the vulnerability of small-cap stocks, particularly in economically sensitive sectors such as energy, materials, and financials. As regional banks tighten their lending standards, these companies face additional pressures.

Jack Ablin, chief investment officer and founding partner at Cresset Capital, points out that larger companies encounter fewer challenges in raising capital compared to smaller enterprises. Within the large-cap space, Ablin emphasizes his focus on quality companies with high dividends.

Recent data from Bank of America Global Research reveals a growing preference for large-cap stocks among investors, with a net inflow of over $2.6 billion into U.S. stocks during the week ending May 19, marking the largest net inflow since October. Of this amount, around $2.2 billion flowed into large-cap stocks, while small-caps experienced net outflows of $42 million.

Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, recommends including both small-cap and large-cap stocks in investment portfolios, particularly during the early stages of an economic recovery. He points to the period following the 2008 financial crisis when small caps initially out


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