The number of S&P 500 stocks moving against the index has reached a record high. Is this a bad sign?

The number of stocks in the S&P 500 that tend to move in the opposite direction has risen to 130—a record high, according to investment bank Evercore ISI. A similar situation accompanied the bursting of the “dot-com bubble” in the early 2000s. Now, the bank’s strategist, Julian Emanuel, sees these stocks as a hedge against the current AI bubble bursting.

In finance, such securities are referred to as stocks with a negative beta: this metric reflects a stock’s sensitivity to market fluctuations, and a negative value means that it typically moves in the opposite direction of the market, according to MarketWatch. As of July 31, 121 stocks had a negative beta—the highest number since 1990.

The S&P 500 may remain near record highs even as many of its constituent stocks fall in price. When the prices of individual companies fluctuate sharply at different times and for different reasons, these fluctuations can offset each other at the index level, explained Bradley Crom, director of investment strategy at WisdomTree, to CNBC. Therefore, according to Crom, the S&P 500’s apparent stability may mask high volatility in individual stocks.

According to Emanuel of Evercore, inverse exposure to the index could help reduce a portfolio’s dependence on AI. “In a world where all other assets have become linked to the S&P 500 in ways that investors may not fully realize, it’s harder to diversify a portfolio. But there is another group of stocks that help diversify a portfolio day after day, as they move in the opposite direction of the index,” MarketWatch quotes him as saying.

Evercore’s October list of stocks with a negative beta is dominated by energy and utility stocks, as well as consumer staples stocks. Insurance companies also feature prominently on the list.

In theory, stocks with a negative beta should offset losses when the stocks that are driving the index higher stop rising, according to MarketWatch. In practice, according to Emanuel of Evercore, this hedge helped limit the S&P 500’s decline during the March sell-off and in July, when the AI stock rally stalled. The effect was weaker in September, but the strategist expects the protective properties to reemerge during future downturns.

The movement of certain stocks against the S&P 500 is largely due to the significant weight of tech giants in the index, according to LPL Financial strategist Adam Turnquist. Gains by a few of the largest companies can lift the index even as many other stocks decline, he explained to CNBC. Massive investments in AI have bolstered manufacturers of chips, equipment, and other infrastructure components, while companies outside this sector have found it harder to keep pace with the leaders.

The energy sector has another source of negative beta: its reaction to oil prices. “This is particularly noticeable this year: as oil prices rise, energy stocks go up, while the rest of the market falls,” noted Turnquist. If the group of market leaders expands, the number of stocks with a negative beta could decline, he believes. At the same time, the strategist expects that differences in stock performance will remain significant as long as investors selectively seek out companies capable of benefiting from the AI boom.

When Emanuel’s team first pointed out the rise in the number of stocks with a negative beta in its June report, he said that “bears” wanted to see this as a sign that the AI stock bubble was about to burst. The strategist acknowledges that such a reaction isn’t entirely unfounded: the last time the number of such stocks peaked was in early 2001, when the dot-com bubble was bursting.

Another sign echoes the dot-com era. On September 21, the S&P 500 rose 1.5%, but 30 stocks hit new 52-week lows, while only 7 hit new highs. According to SentimenTrader founder Jason Gepfert, the last time this combination occurred—when the S&P 500 gained at least 1% while remaining within 1% of its 52-week high— with new lows outnumbering new highs over the same period—was in December 1999, just before the dot-com bubble peaked, CNBC reported.

However, Turnquist of LPL Financial objects to a direct comparison: today’s technology leaders are mature companies with products that are already generating revenue. Krom of WisdomTree also attributes the negative betas primarily to the index’s concentration and expects the current extreme figures to return to normal over time. “The market situation now is not the same as it was in 2000,” he emphasized (as quoted by CNBC).

This article was AI-translated and verified by a human editor