Earnings and AI fears drive ‘extreme’ churn in US stock market

A bumper earnings season and concerns about the fallout from the AI boom are driving “extreme” moves in individual US stocks this year, even as the broad market index treads water.

So far this year, more than one-fifth of constituent stocks in the S&P have gained or lost more than 20 per cent, with risers outnumbering fallers by approximately two to one, even though the overall S&P 500 index is roughly flat.

The gap between the chunky stock moves and the subdued performance of the index this month reached its highest level since the aftermath of the global financial crisis in 2009, according to data from market maker Citadel Securities.

“Single stock dispersion is at extreme levels,” said Scott Rubner, an analyst at Citadel Securities. The threat posed by AI has “accelerated repricing across vulnerable business models, intensifying rotation even as headline [index] performance remains contained”, he added.

The sharp moves are making many traders wary after a lengthy bull run in stocks, but they are also throwing up attractive opportunities for stockpickers prepared to ride out the volatility.

More than half of large-cap mutual funds are outperforming their benchmark index so far this year, the highest level in almost two decades, according to analysts at Goldman Sachs. Active funds have tended to lag passive trackers in recent years, due to the relentless gains for tech mega caps with a high concentration within the index.

But so far this year, more than 60 per cent of stocks on the S&P have outperformed the index as a whole — the broadest range in decades.

Some content could not load. Check your internet connection or browser settings.

One driver has been strong corporate results in recent weeks, with earnings for the blue-chip index growing by 12 per cent year-on-year in the final quarter of last year, according to data from Bloomberg. That marked the fourth consecutive quarter of double-digit earnings growth and a slight increase on the previous three months.

Shares in tractor maker Deere climbed more than 10 per cent on Thursday after strong results, while Spotify rallied almost 15 per cent last week after tripling its profits year-on-year, before plunging 8 per cent two days later.

However, some stocks have also suffered sharp sell-offs, triggered by concerns over Big Tech companies’ high spending on AI as well as the existential threat that the technology could pose to certain sectors, with software and logistics among those hard hit.

“The macro message underlying the index is actually boom. Revenue is growing at 9 per cent. Seven out of 11 sectors have seen profit margin expansion,” said Manish Kabra, head of US equity strategy at Société Générale.

The “lack of excitement” in “a few stocks” in tech was overshadowing this at the index level, he said.

Venu Krishna, head of US equities strategy at Barclays, pointed to “violent rotations” in recent weeks as investors have fled from tech to other sectors such as consumer durables.

“This is yet another sign of the numerous micro-narratives playing out beneath subdued index volatility, against which the earnings tape is playing out,” he said.

The so-called Magnificent 7 — the technology giants that dominate the market-capitalisation weighted index — have fallen 5.6 per cent since the start of January, while seven of the S&P 500’s 11 sectors have risen.

Amazon, Microsoft and Alphabet plunged earlier this month after they announced AI spending plans for this year that, including Meta, total $660bn, up 60 per cent from last year’s levels.

Nvidia is set to report earnings next week, along with Broadcom and Oracle. Around four-fifths of the benchmark index has already reported results.

If mega cap tech stocks do not make big gains, as drove the market last year, then returns at an index level will remain subdued, said SocGen’s Kabra.

“[In] an earnings-driven market, usually you have to tone down your index expectations,” he said. “But once you mute down index excitement, internally, if it’s earnings driven, there will be parts of the market that get phenomenal returns.”