The number of 'negative beta' stocks keeps on climbing

As the market splits into AI and non-AI camps, stocks are increasingly their own best hedge.

For decades, investors concerned about their stock investments sought succor in the bond market. But these days, the best shield against an outbreak of volatility might just be owning other stocks.

As the gap between the stock market's winners and losers has widened over the past few months, more individual names have been trading at odds with the broader index.

Strategists at Evercore ISI have been tracking a sharp rise in the number of so-called negative beta stocks within the S&P 500 SPX. According to their latest numbers, the count has risen to 130, the highest on record. A stock trading with negative beta regularly moves in the opposite direction of the index.

The list is heavily tilted toward energy, consumer staples and utilities names, said Julian Emanuel, a top strategist at Evercore, in commentary shared with MarketWatch. A number of insurance stocks also feature prominently.

Portfolio managers and active investors use beta to evaluate how volatile an individual stock is compared with the broader market. So in theory, stocks with negative beta should help to offset losses when the stocks helping to push the index higher stop working.

Negative beta stocks helped limit the S&P 500's losses during the March selloff and again in July, when the powerful artificial-intelligence-driven momentum trade hit the rocks, Emanuel said. The shielding effect wasn't as pronounced in September, but regardless, Emanuel expects it will again help during future selloffs.

Prior to this latest episode, investors hadn't seen such a large spike in the number of negative beta stocks since shortly after the dot-com bubble peaked. But rather than being a harbinger of doom, Emanuel says, the shift is more a reflection of how AI-related risks have seeped into other markets, such as emerging-market stocks, bonds and corporate credit.

With fewer options free of AI risks, investors have had to turn to other corners of the stock market to provide some buffer against an AI-related unwinding, and negative beta has increasingly become an option.

-Joseph Adinolfi