Trouble is lurking under the surface of the stock market


  • The stock market isn’t performing quite as well as it
    appears if you strip out the market-cap weightings from the
    SP 500
  • A small number of stocks doing a big portion of
    the lifting for an index can be problematic down the
  • A weaker-than-expected dollar is also helping bifurcate
    performance in the US stock market

mega-cap tech
goes, so does the broader SP 500.

The SP 500 is a market capitalization-weighted index,
meaning that the most valuable companies in the index have the
biggest weighting. Apple,
and Amazon
alone make up a whopping 10% of the index on a weighting basis,
for example, despite accounting for less than 1% of the total
number of companies included.

With each of those four stocks up more than 16% year-to-date —
and with three of them surging at least 31% — the SP
has enjoyed an almost 11% climb in 2017.

spx vs spw
SP 500 hasn’t done quite so well this year with
stock-weighting biases stripped out.

Business Insider / Andy Kiersz, data from

But what happens if you strip out company weightings? Is the
SP 500 still a beacon of strength?

Not quite. The benchmark’s
equal-weighted counterpart
, which gives every constituent in
the index the same weighting, has only risen 8.4% this year,
lagging the regular SP 500 by more than two percentage
points. And the divergence between the two gauges has been
accelerating, with the equal opportunity SP 500 having just
completed its worst week of the year versus the market
cap-weighted version.

So what does it all mean? Put quite simply: the foundation of the
US stock market isn’t as strong as it looks on paper. Less
publicized industries are faltering under the surface as mega-cap
juggernauts continue to impose their will on the overall
direction of the market.

One big reason for this divergence is a
weaker-than-expected US dollar
. Down roughly 9% this year,
the slumping greenback has helped the bottom line of
multi-national companies by making their exports more lucrative.
And wouldn’t you know it, the conglomerates enjoying that
earnings tailwind the most are also the ones with the biggest
index weightings.

Meanwhile, smaller, more domestically-focused companies with
weaker pull over stock indexes are failing to get a similar boost
from the weakening currency. As such, the Russell
of US small-cap companies has risen just 4.3% this year,
less than half the SP 500.

Screen Shot 2017 08 07 at 4.21.21 PM
US dollar index is down about 9% this year.


There has also been some turmoil under the surface of the stock
market on a sector basis. Energy stocks in the SP 500 have
slumped 14% this year as
crude oil
prices have struggled to find footing. The resource
slipped into a bear market in late June, throwing cold water on a
sector that was just starting to pick itself up off the mat and
expand profits.

Phone companies have also struggled, falling 9% in 2017.
Frequently used as bond proxies due to their regular dividend
payments and risk-averse profile, telecom stocks have come under
pressure as the Federal Reserve has hiked interest rates, damping
the appeal of their yield.

To be sure, stock market breadth — a measure of how concentrated
gains are — is not yet at levels that are low enough to truly be
deemed worrisome. A
Morgan Stanley equity risk indicator
that factors in breadth
is still in neutral territory, supporting this notion.

Ultimately, narrow market leadership and flagging breadth are
just two pieces to a much more complicated puzzle for stocks.
Investors and strategists alike are increasingly flashing warning
signs, but nothing has been drastic enough to truly spook
traders. Yet.

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