Nasdaq outperforms Dow in May by widest margin since dot-com crash as 'Magnificent Seven' stocks power higher

By Joseph Adinolfi

May was a great month for technology and chip maker stocks. The rest of the market? Not so much.

The dispersion between tech stocks and, well, everything else reached a fever pitch in May, marking a new high for a trend that has been developing since the start of 2023, when investors started buying back tech shares after they led the market lower in 2022.

A quick look at the numbers helps to underline the point: the Nasdaq Composite Index bested the Dow Jones Industrial Average by 9.3 percentage points in May, the widest margin of outperformance since October 2001, according to Dow Jones Market Data. Back then, the Nasdaq was soaring in a torrid bear-market rally in the middle of the dot-com crash. The market would ultimately bottom one year later.

The S&P 500 index also is top-heavy with tech, helping it outperform the Dow, its blue-chip rival, by 3.8 percentage points in May, the most since February 2000, according to DJMD.

While the Nasdaq Composite logged a gain of 5.8% for the month, the Nasdaq-100 did even better, with its heavy weighting of top-performing megacap technology names. The Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, rose 7.9% in May.

Why did technology stocks perform so well this month? The artificial-intelligence craze, which was birthed by the introduction of ChatGPT late last year, has been widely credited with fueling exuberance on Wall Street.

To be sure, tech stocks have been way out in front of the market all year. But a new wrinkle was added in May as Dow tumbled on worries that a potential U.S. government default could exacerbate the economy's problems, as a recession appears to be looming on the horizon.

The Dow in May logged its worst month since February, a month that saw all three major U.S. indexes, the S&P 500, Dow and the Nasdaq, fall in tandem.

The S&P 500 managed to eke out a 0.3% gain for May, but it was only the second time in history, and first time since January 2001, that the broad-based index logged a gain in a month, when only three sectors were in the green.

The S&P 500's information technology sector led the way higher for the months with a gain of 9.3%, rising for the fifth straight month, according to DJMD.

Its communications services sector, another area heavily weighted toward the biggest names in the technology space, including Facebook parent Meta Platforms Inc. (META), gained 6.2%, while the consumer discretionary sector rose 3.9%.

Market strategists noted how unusual it has been to see a handful of technology stocks driving such outsize gains at the index level, while most sectors of the market have been sinking deeper into the red.

The Magnificent Seven

The bulk of big tech's gains this month have been attributed to just a handful of technology stocks, which market-strategists including Steve Sosnick, chief market strategist at Interactive Brokers, and Michael Hartnett, chief investment strategist at Bank of America, have taken to calling "the Magnificent Seven," a reference to the 1960 American Western film.

The group includes both Google parent Alphabet Inc.'s Class A (GOOGL) and Class C (GOOGL) shares, as well as Meta, Tesla Inc. (TSLA), Nvidia Corp. (NVDA), Apple Inc. (AAPL) and Microsoft Corp. (MSFT) shares. These stocks were responsible for nearly 50% of the Nasdaq-100's gains in May, Sosnick said.

"Breadth has been terrible," Sosnick said in a phone interview with MarketWatch. "It's a tale of a few stocks, and everybody else. A few stocks are winning; everybody else is muddling through."

To be sure, smaller stocks with links to AI have also seen huge gains: take C3.ai Inc. (AI), for example, which rose more than 120% in May, according to FactSet data.

Still, it's becoming a familiar lament in equities. "Only tech is up. Pretty much everything else is down," said Mohannad Aama, a portfolio manager at Beam Capital Management, in a phone interview with MarketWatch.

The rally in the Nasdaq has been powerful enough to convince some Wall Street skeptics to warm to equities. In recent weeks, analysts at Bank of America, Citigroup and RBC Capital Markets have advised clients to put more money to work in corners of the market that have been working.

Others, including Aama, wonder about how much longer a handful of workhorse names can keep the rally going, especially now that senior Federal Reserve officials are talking up the prospect of another interest-rate hike later this year.

See:Skipping a rate hike in June may not mean end of Fed 'firming'

"At some point, the rules of gravity have to take hold," Aama said.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-31-23 1731ET

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