Investors should be wary of using the recent performance of major technology shares as an indicator for the state of stock markets, and should look towards the financial, materials and energy sectors for a more accurate picture instead, according to an asset management firm.
Talaria Asset Management co-chief investment officer Hugh Selby-Smith said the strong surge in tech stocks may have created a mistaken belief among investors that the United States has successfully steered clear of recessionary waters.
“The big seven tech stocks – Apple, Microsoft, Nvidia, Amazon, Tesla, Alphabet and Meta – have delivered 13.2 points of return so far this year, while the rest of the S&P 500 has delivered just 2.7 points,” Selby-Smith said.
“In terms of contribution to returns from the S&P 500, the big seven have put all the other stocks in the shade.
“This may be lulling investors into a false sense of security that the US has avoided a recession and that equity markets are recovering. A closer analysis of the index gives a more sobering picture.”
He noted the fervour surrounding the boom in artificial intelligence (AI) has played a significant role in boosting the performance of technology stocks, but whether the substance justifies the hype remains uncertain.
“These stocks have bounced this year because forecasts have stabilised and because there has been excitement around AI. AI especially has allowed investors to overlook sticky inflation and treasury yields close to the levels at the end of 2022,” he said.
“AI, to state the obvious, has little or nothing to do with the likelihood of a feeble economy.”
Instead investors should focus on the financial, materials and energy sectors for more reliable predictions of economic growth as historical data has shown them to be consistently more predictable.
“These sectors traditionally underperform into a recession and have underperformed year-to-date. In philosophy, there is the concept of a category error. This is where properties are mistakenly attributed to one category when they belong to another,” Selby-Smith said.
“The idea that the performance of seven mega-cap tech shares has predictive capacity when it comes to the likelihood of recession seems to us a good example of this sort of misconception.
“Despite the narrowness of the market and the weight of evidence pointing towards recession, our sense is that many investors have made a substantial cognitive leap.
“Tired of waiting, they have concluded that the strength in the headline index is a sign that weak economic growth is off the table. They believe the recession train has left the station because, in fact, it never arrived.”
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