Apple is bigger than the whole market for small caps again. Here's what it means for investors

Published Mon, May 15 20232:42 PM EDTUpdated Mon, May 15 20234:01 PM EDT

The combined value of all of Apple 's shares is greater than the entirety of an index made up of 2,000 small stocks. It's a sign that investors are taking flight to perches where they can ride out an economic downturn. Apple's market cap, a measurement of the value of all of its shares, hit $2.714 trillion Monday, according to FactSet. That's bigger than the combined market cap of all 2,000 stocks in the small cap-focused Russell 2000 , which was at $2.208 trillion. The move is symbolic of broader favoritism toward larger-cap stocks this year, market participants said, as investors try to predict when interest rate hikes will end and whether the economy will tip into a recession. "It is apples to oranges — or small caps," said Willie Delwiche, founder of Hi Mount Research. "It's not just that Apple has been stronger than small caps. It's Apple has been strong while the small caps have been weak." Stocks in the Russell 2000 are underperforming this year because smaller companies are typically more sensitive to the health of the broader economy, which is in question right now as recessionary concerns swirl, Delwiche said. The index is about flat year to date, underperforming the broad S & P 500 index, which has gained more than 7%. Meanwhile, Apple has surged more than 32% as investors bet on a comeback for technology and other growth stocks on hopes of the Federal Reserve reversing course on interest rates. Investors are buying into Apple and other big-cap names as a sort of "safety trade," Delwiche said, as they look for defensive areas in the market when the names that are typically perceived to be safer aren't performing as expected. The communication services and information technology sectors of the S & P 500 have each rallied more than 20% since the start of 2023, while utilities and real estate — both of which he described as defensive staples in a typical market — are down on the year. But the power of Apple and other mega-cap stocks like Microsoft that have led the S & P 500 up this year can disguise a lack of breadth that could cause trouble down the road, he said. "You have market generals leading, and rather than the army following behind, the army is on the sidelines saying, 'Eh, I don't think we're going to take the field right now,'" Delwiche said. "That's where you get the issue for the rest of the market. The longer the broader market doesn't participate, the more risk you have that one of the leaders stumbles, and then you have a broader correction." AAPL .SPX,.RUT YTD mountain Apple, the S & P 500 and Russell 2000 year-to-date How to play the trend Bank of America's Jill Carey Hall said she sees more opportunity in the Russell 2000 than the S & P 500 given that the former is "much cheaper," which can lead to better annualized returns over the next decade. She also noted small caps should be helped by multiyear trends such as the capital expenditure cycle in the U.S., reshoring and the peak of globalization. Still, Carey Hall said she's "tactically cautious," given concerns around the health of regional banks following the industry crisis and the potential for changes to lending standards. Within small-cap names, Steven DeSanctis, an equity strategist at Jefferies, said investors should look at cyclical companies despite the group falling out of favor in recent months as investors narrowed focus on the likelihood of a recession. That's because investors are looking back to 2020 and 2018 for insight into how to position ahead of anticipated rate cuts, he said. DeSanctis said this is the wrong way to think about the market. He thinks rates may stay higher longer, which leads him to favor cyclicals over growth stocks that are considered especially interest-rate sensitive. He also noted that the overhang of the debt ceiling could add further pressure to small caps, given their underperformance during a similar period in 2011. But he said this environment is better given the negative sentiment already pushing the stocks down. "If something goes right for small cap or the overall market, small can have a really nice bounce," he said.