Nasdaq is poised to underperform S&P 500 for first time since 2016

For the primary time in 5 years, tech buyers aren’t the lifetime of the Wall Avenue get together.

As 2021 winds down, the tech-heavy Nasdaq Composite is up 23% for the yr, trailing the S&P 500, which has climbed 28%, via Monday. The final two occasions the S&P 500 topped the Nasdaq occurred in 2016 and 2011.

Tech shares have 4 days left to make up that distinction, however the final week of the yr does not are inclined to carry a lot information that may spur an outsized rally. Indexes have been up throughout the board on Monday, with the S&P 500 climbing to a file.

The Nasdaq began 2021 robust, choosing up the place it left off in 2020, virtually doubling up the S&P 500’s features by mid-February. Then buying and selling tailed off with the arrival of the primary Covid-19 vaccines, which raised hopes amongst buyers that the U.S. was on the verge of getting via the pandemic, probably lessening demand for distant work expertise, dwelling exercise methods, meals supply apps and tech-based lounge leisure.

Subsequent, inflation reared its head, topping 4% in April, then as excessive as 6.8% in November. The Federal Reserve initially anticipated rising costs to be transitory, however they persevered, spurring the central financial institution to take a extra engaged stance, citing expectations for charge hikes in 2022.

That is created a double whammy for high-multiple tech shares. Buyers are frightened concerning the demand aspect of a few of their companies, they usually’re additionally rotating into sectors of the market that have a tendency to carry up higher in a rising charge setting.

“All of the stay-at-home, play-at-home, work-from-home shares have been DOA in 2021, just like the pandemic did not exist anymore,” stated Jake Dollarhide, CEO of Longbow Asset Administration in Tulsa, Okla. “The final 5 years, each time it appeared like there can be a rotation out of tech, everyone purchased the dip — 2021 will go down because the yr that buyers didn’t purchase the dip in tech.”

Throughout the S&P 500, the top-performing subgroup of the yr was power, reflecting hovering gasoline costs. Subsequent got here actual property, which delivers excessive dividends and has benefited from surging demand for warehouse area and residential properties.

Tech is not too far behind, largely as a result of mega-cap firms Apple and Microsoft have held up properly and make up a lot of the tech subgroup, and the general S&P 500. Alphabet and Meta Platforms (previously Fb) are a part of the communication providers sub-index and Amazon is within the shopper discretionary group. Each have barely underperformed the broader index.

The principle downside for the Nasdaq has been the plunging worth of firms that picked up large market caps in 2020, solely to see buyers flip towards them this yr.

Zoom inventory has dropped 45% this yr, after final yr’s 326% improve in income led to a quintupling in its inventory value. Peloton, in the meantime, has plummeted 76% after income progress peaked at 232% in mid-2020, pushing the refill over 430% for the yr.

Twilio, Spotify and Block (previously Sq.) have every fallen greater than 20% this yr and PayPal is down 18%. The WisdomTree Cloud Computing ETF, a basket of publicly traded cloud software program firms, is about flat for the yr after greater than doubling in 2020.

“I identified to purchasers, if you happen to’re heavy tech, you are prone to underperform the general market,” stated Dollarhide. “However take note how a lot you’ve got overperformed the market the final three to 4 years,”

In 2020, the Nasdaq climbed 44%, whereas the S&P 500 rose simply 16%. From the tip of 2016 to the shut of 2020, the Nasdaq received yearly, rising a complete of 139% in comparison with the S&P 500’s 68% improve.

Dollarhide stated he is used the latest pullback to purchase shares of some firms that he sees as properly positioned for the longer term even when they’ve fallen out of favor of late. DocuSign, for instance, is down 30% this yr after greater than tripling in 2020. Dollarhide stated his agency, via its relationship with Charles Schwab, is consistently utilizing DocuSign, as a result of Schwab “eradicated faxes, paper varieties, and it is the one method you may open a brand new account nowadays.”

“I am utilizing DocuSign 5, six, seven occasions a day, the place as I used to be doing faxes or mailings 5, six, seven occasions a day,” he stated.

One other buy he made was Zillow, which has plunged over 50% this yr, largely due to the corporate’s failed effort to crack the home-flipping market. The corporate exited the enterprise in November after racking up a lack of over $328 million within the newest quarter.

“Zillow is only a traditional misstep,” Dollarhide stated. “Stepping into and flipping homes — that is a horrible concept. We purchased on that dip. It is an overreaction to the draw back. They misplaced their method, frankly.” For buyers like Dollarhide, DocuSign, Zillow and even Zoom make for particular person shopping for alternatives.

To make certain, the efficiency distinction between the 2 indexes is not as notable because it was, with the Nasdaq and S&P 500 beginning to look extra alike.

The seven firms with the heftiest weightings within the S&P 500 — Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia — now make up about 27% of the index. They’re additionally the bulkiest members of the Nasdaq, which is the primary cause why the 2 indexes’ progress this yr are separated by just a few proportion factors.

“The market is changing into more and more FAANG,” stated Tom Lee, managing accomplice at Fundstrat International Advisors, referring to Fb, Apple, Amazon, Netflix and Google.

Lee, talking on CNBC’s “Halftime Report” on Monday, stated he views FAANG as extra than simply these firms, and contains different tech leaders with giant market share and pricing energy. Whereas he is involved concerning the impression of inflation and charges on the general market, Lee stated FAANG shares are his second favourite decide, behind power, heading into 2022.

“If there’s panic round inflation and Fed tightening, the remainder of the market takes it on the chin fairly exhausting,” Lee stated. “I believe FAANG is fairly strong within the first half and all the pieces else appears actually shaky.”

WATCH: This is why Fundstrat’s Tom Lee sees a pullback coming in 2022