The US equity market took a rare turn for the egalitarian in September.
A summer rally in mega-cap tech which led to the highest levels of concentration for the top-five stocks in recent memory finally buckled under its own weight earlier this month, setting the stage for a fairly dramatic reversal of fortune.
On the heels of tech’s abrupt correction, the cap-weighted S&P is on track to underperform its equal-weighted counterpart by the most since 2009.
More notable still is the Nasdaq 100’s underperformance versus the S&P. The ratio between the two gauges went parabolic in 2020, as the pandemic accentuated and otherwise served to reinforce existing trends favoring America’s tech behemoths. Throw in the self-feeding dynamics associated with a retail investor options mania, and the stage was set for outperformance the likes of which hasn’t been witnessed since the dot-com bubble.
In September, the spell broke. As of Thursday, the Nasdaq 100 was poised to underperform the S&P by the third largest margin since 2002.
Assuming big-tech does, in fact, underperform the S&P for the full month, it would snap an incredible 11-month streak of outperformance.
A similar dynamic is observable when one looks at big-tech versus small-caps, the quintessential example of the pandemic zeitgeist and “rotation frustration”. As of Thursday, the Nasdaq 100 was underperforming the Russell 2000 by nearly 7% for the month.
Were that to persist for the rest of September, it would mark the third biggest underperformance for big-tech versus small-caps since the summer of 2002.
This was long overdue in more ways than one. You might recall that coming into September, the market was placing the highest revenue premium on the Nasdaq 100 relative to the Russell in twenty years.
As shown in the figure (below), the price to sales ratio for big-tech accelerated markedly over the summer.
Of course, as the chart header tacitly reminds you, there’s a reason why market participants are willing to pay up. Increasingly, it seems as though there is no place in the post-COVID world for businesses that don’t in some way facilitate digital existence.
Seen in that context, September’s underperformance may be seen in hindsight as little more than a footnote on the way to ever higher highs and infinity multiples.
For what it’s worth, Credit Suisse just reduced their tech Overweight, recommending investors get more selective. Valuations, the bank’s Andrew Garthwaite says, are stretched, as are other metrics.
Still, Credit Suisse doesn’t see the current froth in tech as “extreme”. If this were a bubble, tech would be trading at a P/E of between 45X and 72X, Garthwaite remarked. At “just” 37X, I suppose the Nasdaq can be described as “cheap”.