Gilnature
Barclays analysts recommend owning mega-caps “with caution,” fearing consolidation, according to the Barclays Global Volatility Pulse report, released on Tuesday.
The mega-caps: (NVDA), (META), (MSFT), (GOOGL), (AAPL), (AMZN), (TSLA) – are still favored due to “big tech” driving the upward revisions.
Last year the markets witnessed a historic rally in mega caps, compared to the rest of the market. Year to date, in 2024, we have seen an extension of that rally, which on a rolling annual basis is very close to the all-time highs of the Dot.com bubble: 20.3% on April 8, 1999, compared to 18% on April 22. February 2024.
“Unlike the dot.com bubble, however, recent outperformance has not arisen from unreasonable valuations, but has been driven by earnings growth differentials,” the analysts said. “Big tech companies are almost single-handedly keeping the S&P 500 (SP500) margin-dropping story alive.”
Year-over-year EPS growth at large tech companies is up 63%, while the S&P 500 Index (SP500), excluding the tech sector, is -2.4%.
Analysts also said the AI ”frenzy” culminated in Nvidia’s (NVDA) blockbuster earnings and contributed to mega-cap outperformance.
“Investors remain very optimistic about this market segment, as evidenced by the fact that, for example, both the semi-budget ETFs (SMH) and (SOXX) have outperformed our bullish sentiment, having gained the most in the last two weeks influx in 10 years. “the analysts said.
Barclays remains “fundamentally” bullish among big tech companies, but this “exuberant sentiment and over-positioning” calls for caution against possible consolidation, analysts said.
They added that it is preferable to maintain a “narrow leadership” position “in a risk-controlled manner” through options.
- Buy S&P 500 ETF Trust (SPY) calls partially funded by Invesco S&P 500® Equal Weight ETF (RSP) calls. – “Although the vol (SPY) vs. (RSP) ratio has recently swelled, it remains historically depressed, especially for shorter maturities.”
- Buying (SPY) April 24 510 call (ref. 505.99, 49-delta) and selling (RSP) April 24 165 call (ref. 161.35, 35-delta) costs 58 basis points, approximately.
- Buy calls with outperformance of (SPY) versus (RSP).
- This is their recommended trade: Buy the 2.5% June 24 outperformance call on (SPY) versus (RSP) which recently became in-the-money, well before expiration. Now, the same package costs approximately 0.85%.