Source: Leverage Shares analysis

While « chip » stocks such as NVIDIA, AMD and Applied Materials easily feature in the Top 10 Gainers, a small group of industrial stocks and utilities – two of the most beleaguered sectors relative to their weights – are resilient and consistent winners.

Being in Communication Services – one of the strongest performing sectors in the YTD – didn’t help Warner Bros Discovery or Paramount; both companies have continued to hemorrhage value. Gloomy consumer outlook affects both Walmart and Tesla, which are two radically different companies, while a steady line of aircraft failures hammer away at Boeing, one of the few remaining major aircraft manufacturers in the post-Cold War world.

Instead of a sector rotation – which could be construed as market participants rationalizing away from overwrought valuations in « tech »-related sectors in light of improving economic conditions – major trends highlight that market breadth continues to be hammered with investors flocking to a small set of stocks independent of sector. The key takeaway from large-scale economic data¹ strongly suggests that « consumer-facing » companies are in for a rough ride in the next few quarters. In contrast, the likes of major « chip » stocks and communications firms that have a preponderance of « corporate » clients are being favoured since corporations are expected to be more resilient spenders going forward. Hence, market breadth is expected to be bleak.

But there are limits to how far forward-looking valuations can be stretched, particularly with the « high tech » constituents of the Nasdaq-100 which have progressively emerged as the strongest drivers behind index trajectory. Even with « corporate »-facing stocks leading the way for the index, there is ample potential for snapbacks and bearish volatility. Professional investors would do well to consider two Exchange-Traded Products based on the QQQ ETF (which tracks the Nasdaq-100): QQQ5 offers a 5X exposure to the upside of the index’s trajectory while QQ3S offers a 3X exposure to the downside.

Footnotes:

1. « U.S. Debt In 2024: A Major Crisis Is Brewing », Leverage Shares, 19 March 2024