Market leadership is shifting. Here’s why investors should pay attention


The market, as we know, is seductive, luring its participants skillfully until they are as hooked as the sea bass that can’t resist the shimmering flies we cast at them on Buzzards Bay.

Poor fish. Poor buyers of bitcoin at $61,000, Snowflake at $380, and Teladoc at $290. But just because we fall for the darlings and shun the hated doesn’t mean inevitable decimation.

Those bass get thrown right back (about 99% of them, anyway), and the dregs of one market can, and often should, rise again. Let’s take, for example, the performance of the technology sector, which fell from grace to disgrace at the end of 2020.  

As the table shows, the strongest sector last year, technology, has been the weakest this year, as the halo effect for digitally dominant global players during the pandemic wore off, and vaccines offered a road to redemption for 2020’s losers. 

The shares of reopening groups, such as airlines, hotels, energy, financials, and industrials began to rally hard in late 2020 as those industries anticipated a post-pandemic earnings surge, exceeding the earnings’ advance in technology companies. 

If stock prices anticipate earnings changes, the data above supports technology’s underperformance over the past six months. The profit trajectory of industries knocked out by Covid, such as energy, financials, and industrials, propelled by a huge wave of pent-up demand, appears to surpass that of technology. In summary, that is the argument made by cyclical and value stock bulls over the past six to nine months.  They backed the right groups, as the price changes above depict.   

Avoid making assumptions

However, making broad assumptions from a collective data set can lead to some misleading conclusions.  To say that baseball is boring just because pitchers take too long to deliver each ball is an oversimplification (although a definite contributor). 

Similarly, the S&P technology sector is dominated by Apple and Microsoft, which account for 41% of its market weight, both of which have underperformed this year, and does not include several of the most visible and dominant digital growth companies. Alphabet, Facebook, Amazon, and Netflix are all members of the FAANG cohort, but only two reside under the tech heading. 

After some blistering growth in 2021, Apple and Microsoft should see more moderate profit increases in 2022. As the table below illustrates, most of these large-cap growth names are expected to show earnings per share growth ahead of the S&P next year, although many of them have underperformed the S&P this year.

We have written about how the multiples of many large-cap growth stocks have fallen as their earnings estimates have advanced, rendering them more attractive in the past few months. The table below highlights the movement toward the Nasdaq and the growth stocks recently.

If we compare the top ten performers among the thirty largest S&P 500 stocks year-to-date and over the past month, we see a sharp recent shift from value names like Chevron, Exxon, and JPMorgan toward growth/tech.  The only names appearing on both lists are Alphabet, Nvidia, Paypal and Facebook.  

The market appears to be embracing large-cap tech and digital names after having steered away from them for over half a year.

After handsomely rewarding cyclical and reopening stocks, investors may now be looking toward 2022 and seeking higher long-term sustainable growth rates at comparable price-earnings ratios. The fact that the 10-year Treasury rate has fallen back from its march toward 2% into the 1.5% level is also positive for growth stocks. 

While it would be naïve to suggest that this trend should continue for the rest of 2022, markets frequently revert to forward-looking earnings growth as they rotate among industries.

Now, let’s find an antidote to four-hour baseball games that can simultaneously shift momentum back toward that sector of the sports universe.     

Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.



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