The S&P Is Up 8% In 2023; Without AI It Would Be Down 2%, Below 3,800
In the past month we have discussed on multiple occasions the unprecedented collapse in market breadth, driven by a record outperformance of a handful of tech names...
... which has seen the Nasdaq's advance/decline line plunge to all time lows even as the Nasdaq is up more than 21% YTD...
... and where JPM recently observed that "Market Breadth Is The Weakest Ever" with Goldman's David Kostin adding that there is elevated risk of a sharp market drawdown as a result of the collapse in market breadth.
Today, we get a new perspective on the market's performance when normalized for the record collapse in breadth. According to SocGen it's not so much a handful of stocks that has carried the entire market this year: it's just one specific trade, Artificial Intelligence (which will soon spark hundreds of millions in margin-boosting layoffs across western countries).
As SocGen's Manish Kabra writes, "the AI boom and hype is strong. So strong that without the AI-popular stocks, S&P 500 would be down 2% this year. Not +8%."
Kabra reports that his update on SocGen's AI sentiment news indicator keeps rising exponentially and more extended than when he first talked about it just a few weeks ago.
What is remarkable is that AI is nothing new: as a theme, Artificial Intelligence has been with us for decades (SocGen suggested being long SG Robotics and AI Equity as a secular theme last year), but what is going on now is unprecedented, and it is virtually impossible to fight against a very strong hype on a very short-term, and according to Kabra, what one can own is the defensive-Growth stocks with the top-20 most AI-held stocks within the top 15 AI ETFs.
Which brings us back to the topic of 2023's record narrow leadership: The narrow performance is seen across the S&P 500 sectors with 8/11 broader sector groups seeing market-cap weighted indices outperforming equal-weighted indices. According to ScoGen calculations, the S&P 500 ex-AI boom stocks would be below 3800.
Yet despite this seemingly unsustainable collapse of market leaders, SocGen concludes that narrow leadership should continue: "We do see the narrow performance in the US equities to persist as the backdrop stays unfavorable for leveraged, Small-caps, Value stocks, and companies that have carried out unsustainable buybacks."
More in the full note available to pro subs in the usual place.