‘They Started Shooting The Generals’: All Eyes On Tech

The post-Fed surge in big-cap US tech may have been more about mechanical flows than any fundamental takeaway from the final FOMC meeting of 2021, but the ensuing reversal in the Nasdaq 100 was a function of “some good old-fashioned idiosyncratic US Equities earnings developments,” Nomura’s Charlie McElligott wrote Friday.

He was referring, of course, to Adobe, which suffered a horrendous drop after delivering a disappointing outlook (figure below).

The problem is the same as it ever was. Lopsided positioning in growth favorites with heavy index weightings makes the “broad” market vulnerable in an environment where macro volatility picks up. Rising yields and elevated inflation pose a risk to long duration equities, but in addition to that, lofty multiples mean some of the biggest names are at risk of de-rating on Fed tightening, especially when markets get an excuse to question rosy assumptions about revenue and profit growth.

McElligott on Friday called Adobe’s outlook “just a soul-crusher for Growth-heavy positioning.”

The decline illustrated in the simple figure (above) was outsized compared to the the implied move headed into earnings. That matters because, as Charlie went on to note, Adobe is the Nasdaq’s ninth-largest stock, and the seventh-best performer in the NDX over the last 10 years. “This name has been a core holding and ‘hiding place’ for a long time,” he remarked.

As Adobe’s bad day pulled the rug from beneath Wednesday afternoon’s hedging flows-driven rally, “they began shooting against ‘The Generals’,” McElligott said. Another simple figure illustrates the point (below).

Although there’s never a “good” time for heavily-weighted stocks to get hit, now is a particularly inopportune moment.

Recall that breadth has collapsed. Just five stocks accounted for more than half of the S&P’s return since the end of April. Last week, Goldman noted that MSFT, GOOGL, AAPL, NVDA and TSLA “together account for more than one third” of the S&P’s YTD return.

As the figure (below, from Goldman) shows, those names chipped in more than double their starting weight. Their combined share of index market cap is up 4ppt this year, to 22%.

“Mega-cap Growth / Tech names have been doing almost all the index lifting, hence the focus on deteriorating breadth in recent weeks,” McElligott said Friday.

He went on to recap sequencing and the setup coming out of OpEx (essentially, you have to weigh the potential for a wider distribution of outcomes post-OpEx with a high bar for stocks to realize the currently-implied daily moves), before coming back to the points outlined above.

“The biggest point of all is that the Equities pain isn’t about Index, it’s about [a] thematic-, sector-, factor-crowded positioning disaster,” McElligott wrote, noting that central banks’ hawkish pivot created a rates-driven “accident” in expensive growth and tech shares, where multiples are susceptible to compression.

“All this crowded legacy positioning [is] trapped into vapor moves to the downside,” he said. “And peak year-end illiquidity [is] exacerbating the mess.”