An excellent (but worrying) performance

This year too, the performance of the American S&P500 index is linked to its large capitalization stocks. The "magnificent seven" (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla) are still "partially" contributing to the overall performance of the index to a much greater extent than the rest of its other constituents. Since the beginning of the year, the S&P 500 index has a performance of 6.69%, compared to its equally weighted version (where each stock weighs 1/500), which has a performance of only 2.48%. I wrote that the magnificent seven are contributing "in part", as they have become the "magnificent 5 + 1".

Two stocks, Apple (-5.20%), and Tesla (-22.74%), are in negative territory this year due to results not in line with expectations. It is rumoured that Tesla's place has now been taken by Ely Lilly, a pharmaceutical giant which, with its drug for the treatment of diabetes which causes weight loss as a side effect, is now achieving record growth in terms of capitalization (708 BUSD vs. 620 BUSD of Tesla), and performance (+32.02% since the beginning of the year).

In addition to these I would also personally like to point out the Warren Buffett's company, Berkshire Hathaway Inc. stock, which in terms of capitalization (886 BUSD) and performance since the beginning of the year (16.98%, vs. +9.12% of Microsoft, +3 .09% of Alphabet and +15.17% of Amazon), is very well positioned. Furthermore, it is a Value stock, which has a very different curve construction from Growth stocks, and which, in the writer's opinion, is an interesting stock to follow in the next period.

Doing some research on the various sector indices, the situation of a few stocks that drive their benchmark index is difficult to find, but still present. I came across an analogous situation when analyzing the aerospace sector, which represents one of the new points of interest for investors. There is a benchmark index that includes the Aerospace and Defense sectors together, the MSCI World Aerospace & Defense index. This index had caught my attention a year ago, as it was demonstrating a reversal of its relative strength compared to the MSCI World index in the first quarter of 2022. We can see in the graph below that the relative strength ratio, indicated in the last box at the beginning of 2022, has reversed. In 2023 it began to weaken, but despite this, the price of the index, indicated in the central box, created a higer low by bouncing off the previous price level of early 2022 at point (a), where the Msci World index made its last relative maximum exceeded only a few weeks ago. In the last two years this position is therefore more advanced than the global index.

Broadening the analysis to the geographical part, I noticed that the same index, limited to the European sector only, has a trend that rivals the indices of the American technology sector. In the following graph we can see the performance of the last two years of the MSCI Aerospace & Defense index, similar to that of the Nasdaq and superior to that of the S&P 500 index, but above all the notable distance between these three indices and the one relating to the European sector dedicated to Aerospace & Defense.

The impressive performance of the European index in the last two years is due to just four of its component stocks. They are Rheinmetall, Rolls Royce, Saab, and Leonardo. We can see in the two-year graph the performance of the four stocks compared to the top ten constituents.

What do these four companies do that is so special? These are not companies linked to the aerospace sector, but rather to the defense sector, as a good part of their turnover comes from the military sector. Rheinmetall produces weapons and military vehicles (among which we have the well-known Leopard tank), Rolls Royce, has 30% of production dedicated to engines for aircraft, ships and military submarines, Saab, for approximately 70%, military aeronautics and defense systems, and the Italian Leonardo, helicopters and defense systems. It is clear that these companies, closer to the new conflict zones, are much better performing than the American ones which, although they have higher prices, have never had such spectacular performances. According to the International Institute for Strategic Studies, defense spending in Europe rose to $388 billion last year, levels not seen since the Cold War. This indicates that the sector is expanding and therefore there is an ever-increasing production of weapons. Despite the remarkable performance, from an ethical point of view, the data is rather worrying.

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).