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Pexels Sam Willis 3934512
Concentration risk
It is not new news that a handful of mega cap Tech stocks have driven the 2023 equity market rally. But the degree to which the broad equity market relies on these few companies is reaching historical levels.

The chart below shows the regular market cap weighted QQQ ETF versus its equal weighted counterpart QQEW. The ratio is approaching the highs recorded in q4'21 - the peak of the Covid lockdown tech rally.
On Qi there is a striking difference between the two ETFs. Both in terms of the importance of macro, and their valuations.

QQQ remains just below our threshold for a macro regime. No signal can therefore be generated but it sits 1.4 standard deviations (8.1%) rich to model.

QQEW has 80% model confidence. It is in a strong macro regime. It is also rich but the Valuation Gap is modest; 'just' 0.5 std dev (2.5%).

The macro regimes are identical. Tech stocks want a Goldilocks mix of reflation, easy financial conditions and healthy risk appetite.
In short, the mega cap FAANGs are rich and idiosyncratic plays. But broader US technology stocks are a macro play, and are largely behaving as they should given current macro conditions.

Put another way, the FAANGs are responsible for lower macro model confidence and rich valuations. Consider the following stats:
  • Meta - macro model confidence of 57%; the stock is 2 standard deviations rich to model.
  • Apple - 28% model confidence, 1.6 std dev rich.
  • Amazon - macro explains just 20% of the variance of AMZN. The stock sits 1 std dev above model value.
  • Google - 37% and 1.6 std dev rich
  • Microsoft - 51% and a FVG of +2.3 std dev
Mega cap Tech is marching to a different tune. Most likely, the hype around generative AI has become more important than macro fundamentals.

Even in a week that contains ISM, Payrolls and a Fed meeting it is not hyperbole to say Apple's earnings on Thursday are potentially the biggest focus for equity markets. It remains the biggest company in both the S&P500 and NASDAQ.

If Apple can beat consensus expectations then the odds favour a continuation of the rally; maybe even a breakout of the mind-numbing range of recent months.

That will frustrate the bears, especially if the elasticity of mega cap outperformance has stretched as far as it can, meaning the broader market enjoys a bout of catch up. The bear camp will be hoping disappointing earnings are the catalyst for mega caps to catch down.

Qi's QQQ vs. QQEW Long Term model is not in regime. The ST model very much is (94% confidence) and suggests the market is simply tracking macro conditions.
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