S&P 500 Stocks, 75% 'Shed Tears of Blood'..."Only Big Tech Stocks Smiled"

▲ U.S. Stock Market, S&P 500, Dollar (USD)/AI Generated Image

The S&P 500 index, a leading indicator of the U.S. stock market, maintained a slight upward trend in September, appearing to show robust performance. However, it was revealed that three out of four constituent stocks actually suffered from severe internal polarization with declining share prices. It is pointed out that the market capitalization-weighted method, centered on mega-cap tech stocks, created an optical illusion, deepening the index's misperception.

MarketWatch reported on September 30 (local time) that despite the S&P 500 index showing a slight increase based on early September trading, 75% of all constituent stocks recorded negative monthly returns. Out of 11 sectors, a staggering 8 sectors could not avoid a monthly decline. On a year-to-date cumulative basis, the index rose by 12.4%, with most sectors maintaining an upward trend except for three. However, in September, the limitations of index defense, heavily reliant on a few big tech companies, were starkly revealed. Indeed, Nvidia (NVDA), which alone accounts for an 8.3% weighting in the SPDR S&P 500 ETF Trust (SPY), supported the index's bottom by rising 23.6% this year.

The stock with the worst decline among S&P 500 components this month was Fair Isaac (FICO), a credit scoring company. Fair Isaac's stock plummeted 27% in a single day on Tuesday, marking its worst day since 1989. This was influenced by the announcement from Bill Pulte, Director of the U.S. Federal Housing Finance Agency (FHFA), that VantageScore, a competing credit scoring system, would be equally incorporated into the mortgage pricing models of government-sponsored mortgage guarantors Fannie Mae and Freddie Mac.

Furthermore, with Rocket Mortgage, the largest U.S. mortgage company, deciding to prioritize the use of VantageScore, Fair Isaac's decades-long monopolistic position began to waver. Equifax (EFX) and TransUnion (TRU), two of the three major credit rating agencies that co-developed VantageScore, also appeared on the list of top decliners in September, experiencing concurrent adjustments. TransUnion's announcement to freeze the price of VantageScore 4.0 at $0.99 per inquiry until December 2028 further raised concerns about deteriorating profitability, signaling a price war.

However, some market observers cautiously suggest that the federal government's change in pricing models does not necessarily mean a complete overhaul of U.S. mortgage underwriting. This is because Fannie Mae and Freddie Mac, which purchase and securitize U.S. mortgages, still use existing legacy credit scoring models in parallel within their acquisition guidelines. Experts pointed out that while the regulatory shock triggered a short-term sell-off, it is necessary to monitor the actual speed of system transition in the financial sector and its impact on market dominance in the lending market.

While a few top market-cap stocks propped up the index, a 'market of optical illusion' where 75% of stocks tumbled shook the New York stock market in September. Amidst the seismic shift in the credit rating industry, directly hit by mortgage regulation reforms, market attention is focused on whether the index concentration phenomenon will ease and warmth will spread across the entire market.

[Article Summary]

-The S&P 500 index rose slightly in September, but 75% of its constituent stocks and 8 sectors recorded monthly declines.

-A few large-cap stocks like Nvidia (NVDA) defended the index, while Fair Isaac (FICO) plunged 27% in a single day, performing the worst.

-The concurrent sharp decline of credit rating agencies, whose monopolistic systems were shaken by the Federal Housing Finance Agency's introduction of VantageScore, was notable.

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