Equities in Focus

Up, Up and Away
 

On the heels of a strong first-quarter reporting season, the trend in favorable earnings breadth is hitting a new dimension (Display 1). With more companies’ profit forecasts being raised than cut, it is clear that solid corporate fundamentals are not confined to just a handful of winners. But this rising tide of earnings expectations has not lifted all boats.
 

Fewer Victors and Volatility’s Dual Complexion
 

Quarter to date, only 128 of the S&P’s 501 constituents have outperformed the index, roughly 26%, driven by industries such as semiconductor manufacturers and providers of tech hardware and storage. Another 173 stocks have been positive but still lagged the benchmark, while 200 have been negative (Display 2). This, in part, helps explain why pairwise correlations among S&P 500 stocks have been low (Display 3), as many stocks are marching to different drummers.
 

The volatility story is just as interesting (Display 4). The S&P’s index-level, three-month option-implied volatility* remains subdued, consistent with a market that has been in a strong uptrend. But the average stock’s implied volatility† is much higher. This spread between calm index volatility and higher individual stock volatility is the kind of environment in which stock selection can matter more.

Our View
 

Do not confuse a narrow market with a barren one. We believe a selective mix of durable AI capex beneficiaries, companies that successfully adopt AI, and those insulated from its disruption may create a stronger alpha formula than simply leaning into the current performance outliers. If the market broadens to a similar degree as its earnings have, today’s dispersion could become tomorrow’s reward.

To learn more about AB’s equity investment solutions and to access other market insights, visit Equity Investments | AB.