Negative beta stocks surge amid market concentration and AI-driven divergence

Beta measures how a stock moves relative to the rest of the market. A negative beta means an individual stock's returns moved in the opposite direction of the S&P 500 over the measured period.

The surge in stocks with a negative beta dovetails with other unusual market signals. The S&P rallied 1.5% last Monday. The same day 30 stocks touched a 52-week low while just 7 scored a new high. The last time the S&P 500 gained at least 1% while sitting within 1% of a new 52-week high and new lows outnumbered new highs was in December 1999, right before the very top of the dot-com boom, according to Jason Goepfert, founder of SentimenTrader.

The two indicators show that market indexes can remain at or close to records despite wide divergences among individual stocks.

Widening divide

The yawning gap largely reflects how concentrated the S&P 500 has become, according to Adam Turnquist, chief technical strategist at LPL Financial.

Mega-cap technology companies carry an outsized weight in the benchmark, meaning a strong performance from a small number of stocks can drive the index even when many others are moving the other way.

"It only takes a few of those mega caps names to work, and a lot of the smaller weighted stocks don't need to work," Turnquist told CNBC, pointing to unusually low correlations among S&P 500 stocks.

The same dynamic explains why the broader index can look relatively calm even when individual stocks are making large moves, said Bradley Krom, director of investing strategy at WisdomTree.

"Beta is a function of correlation and volatility," Krom said. When stocks experience large moves at different times and for different reasons, those moves can largely offset one another at the index level.

In July this year, Alliance Bernstein, using one-year trailing returns, found an unprecedented share of U.S. stocks displaying negative beta as AI winners powered market gains.

Semiconductor makers, hardware companies and other AI infrastructure beneficiaries have benefited from enormous capital spending, while companies outside the AI trade have struggled to keep up.

"But a narrow market can also distort the signal investors receive from index returns. When a handful of companies dominate performance, many financially sound businesses may lag or even decline, simply because they aren't tied directly to the most powerful market narrative," wrote Kurt Feuerman, chief investment officer of Select U.S. Equity Portfolios at AllianceBernstein.

Negative energy

Energy stocks with negative beta are being driven by different forces.

"Another part of the other story is energy. That's been pronounced this year: higher oil prices, higher energy stocks and then the rest of the market trades lower," said Turnquist, seeing energy as an important part of the negative-beta story, alongside more defensive sectors.

Earlier this month, Evercore ISI used a six-month measure to call out 115 S&P 500 stocks with negative beta, a list skewed toward energy, utilities and consumer staples. The investment bank called the energy sector a "synthetic S&P 500 put option" because of the way it has reacted to geopolitical pressure.

If market leadership broadens out, Turnquist believes the number of negative-beta stocks could decline. But he expects dispersion to remain elevated as investors become remain selective toward beneficiaries of AI spending and seek returns there.

Krom at WisdomTree expects the recent extreme readings to eventually revert to the mean. Similar spikes appeared around the 1999-2000 dot-com bubble, he said, when market concentration and large moves in a narrow group of stocks also triggered unusual divergences.

Turnquist pushed back on comparing today with the dot-com era, leading tech companies now are more mature businesses with established revenue and products. Krom is on the same page. He said the individual pieces driving returns don't have the same historical relationship they've had in the past.

"It is not the same market environment now versus 2000," Krom said. The negative betas seen today boil "down to the amount of market concentration."