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Nearly half of the shares in S&P500 are moving against the index with a negative beta, an unusual divergence that is becoming increasingly difficult to ignore.
About 45% of S&P 500 stocks have a negative three-month beta, according to a recent note from Goldman Sachs. The data aligns closely with CNBC’s findings that nearly 40% of S&P 500 stocks had a negative three-month beta relative to the index, while 17% have a negative one-year beta, based on weekly returns.
Beta measures how well a stock is doing relative to the rest of the market. A negative beta means that an individual stock’s returns moved in the opposite direction as the S&P 500 during the measured period.
The surge in stocks with negative beta fits in with other unusual market signals. The S&P rose 1.5% last Monday. On the same day, 30 stocks touched a 52-week low while only seven hit a new high. The last time the S&P 500 gained at least 1% when it was within 1% of a new 52-week high and new lows outnumbered new highs was December 1999, just before the peak of the dot-com boom, according to Jason Goepfert, founder of SentimenTrader.
Both indicators show that market indices can remain near their record highs despite wide divergences between individual stocks.
Growth of the gap
The yawning gap largely reflects how concentrated the S&P 500 has become, according to Adam Turnquist, chief technical strategist at LPL Financial.
Large-cap technology companies have an outsized weighting in the benchmark index, meaning strong performance by a small number of stocks can boost the index even when many others are moving in the other direction.
“It only takes a few of these mega-caps to work, and a lot of the low-weight stocks don’t need to work,” Turnquist told CNBC, pointing to the unusually low correlations among S&P 500 stocks.
The same dynamic explains why the broader index can look relatively calm even when individual stocks make big moves, said Bradley Krom, director of investment strategy at WisdomTree.
“Beta is a function of correlation and volatility,” Krom said. When stocks experience large movements at different times and for different reasons, these movements can largely offset each other at the index level.
In July of this year, Alliance Bernstein, using one-year rolling returns, found that an unprecedented proportion of US stocks had negative beta as AI winners propelled market gains.
Semiconductor makers, hardware companies and other beneficiaries of AI infrastructure have benefited from huge capital spending, while companies outside the AI sector have struggled to keep pace.
“But a thin market can also distort the signal that investors receive from index returns. When a handful of companies dominate performance, many financially healthy companies may lag, or even decline, simply because they are not directly tied to the market’s most powerful narrative,” wrote Kurt Feuerman, chief investment officer of Select US Equity Portfolios at AllianceBernstein.
Negative energy
Negative beta energy stocks are driven by different forces.
“Another part of the story is energy. It’s been pronounced this year: higher oil prices, higher energy stocks, and then the rest of the market trades lower,” Turnquist said, seeing energy as an important part of the negative beta story, alongside more defensive sectors.
Earlier this month, Evercore ISI used a six-month metric to call 115 S&P 500 stocks negative beta, a list skewed toward energy, utilities and consumer staples. The investment bank called the energy sector an “S&P 500 synthetic put” because of how it has responded to geopolitical pressures.
If market dominance expands, Turnquist believes the number of negative beta stocks could decline. But he expects dispersion to remain high as investors remain selective about who benefits from AI spending and seek returns there.
WisdomTree’s Krom expects recent extreme readings to eventually revert to the mean. Similar peaks appeared around the 1999-2000 dot-com bubble, he explained, when market concentration and large moves in a narrow group of stocks also triggered unusual divergences.
Turnquist backed away from comparing today to the dot-com era, with major tech companies now being more mature businesses with established revenues and products. Krom is on the same wavelength. He said that the individual elements that generate returns do not have the same historical relationship as in the past.
“The market environment is not the same as it was in 2000,” Krom said. The negative betas observed today boil down to “the degree of market concentration”.
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