Nearly half of the stocks in the S&P 500 index are moving in the opposite direction to the index's trend, with a negative beta, and this unusual divergence is becoming increasingly difficult to ignore.

A recent note from Goldman Sachs shows that approximately 45% of the components in the S&P 500 have exhibited negative beta over the past three months. Statistics from CNBC also support this finding: nearly 40% of the S&P 500 constituents had a negative three-month beta relative to the index; when calculated on a weekly basis, 17% of the constituents showed negative beta over the past year.

Beta measures the volatility of a stock relative to the overall market. A negative beta indicates that, over the period being measured, the return of that stock moved in the opposite direction to the S&P 500.

The increase in the number of negative beta stocks also corresponds with other abnormal market signals. Last Monday, the S&P 500 rose by 1.5%. On the same day, 30 stocks hit 52-week lows, while only 7 stocks set new highs. SentimenTrader founder Jason Goepfert noted that the last time the S&P 500 rose by at least 1% within 1% of its 52-week high, and there were more new lows than new highs, was in December 1999, before the peak of the internet bubble.

Both indicators suggest that even though there is significant differentiation among individual stocks, market indices may still remain near record highs.

Differential expansion

LPL Financial Chief Technical Strategist Adam Turnquist stated that this significant gap largely reflects the current concentration level of the S&P 500.

Large technology companies have too high a weight in benchmark indices, which means that the strong performance of a few stocks is sufficient to drive the index upward, even though many other stocks are moving in the opposite direction.

Turnquist to CNBC states: 'As long as a few of those very large market capitalization companies perform well, many stocks with smaller weights do not need to perform exceptionally well.' He pointed out that the correlation among the components of the S&P 500 is unusually low.

WisdomTree, the Director of Investment Strategy, stated that the same dynamics also explain why broader indices appear relatively calm even when individual stocks experience significant fluctuations.

Krom said, "Beta is a function of correlation and volatility." When stocks experience significant fluctuations at different times for various reasons, these fluctuations tend to cancel each other out at the index level.

In July this year, AllianceBernstein found through a one-year rolling return analysis that, as winners in the field of artificial intelligence drove up the market, a record proportion of U.S. stocks exhibited negative beta values.

Semiconductor manufacturers, hardware companies, and other enterprises that benefit from the construction of artificial intelligence infrastructure reap benefits from massive capital expenditures; however, companies that are not part of the AI main trading line find it difficult to keep up.

AllianceBernstein's Select U.S. Equity Portfolios Chief Investment Officer Kurt Feuerman writes: "But a narrow market can also distort the signals that investors receive from index returns. When a few companies dominate the performance, many financially sound enterprises may fall behind or even experience declines simply because they are not directly tied to the strongest market narrative."

Negative beta in the energy sector

Energy stocks with negative beta are driven by different forces.

Turnquist said, "Part of another story is energy. This year, that's been very clear: oil prices are higher, energy stocks are stronger, while other parts of the market have weakened." He believes that energy and more defensive sectors are important components of the negative beta story.

Earlier this month, Evercore ISI used a six-month indicator to point out that 115 stocks in the S&P 500 exhibited negative beta, with this list clearly leaning towards energy, utilities, and essential consumer goods sectors. The investment bank described the energy sector as a “synthetic put option on the S&P 500,” due to its reaction to geopolitical pressures.

Turnquist believes that if the range of market leadership spreads, the number of negative beta stocks may decline. However, he expects that as investors continue to selectively pursue those benefiting from artificial intelligence spending and seek related returns, market differentiation will remain high.

According to Krom of WisdomTree, it is expected that these extreme readings will eventually return to the average in the near future. He mentioned that similar surges also occurred during the internet bubble period from 1999 to 2000, when market concentration and significant fluctuations in a few stocks also led to abnormal divergences.

Turnquist opposes making a direct analogy between today and the internet bubble era. He stated that today's leading technology companies are more mature enterprises that already have stable revenues and products. Krom shares the same view. He said that the various factors that drive returns are not related to past history in the same way.

Krom said, "The current market environment is not the same as it was in 2000." He stated that the negative beta factor observed today "ultimately stems from market concentration."