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🍻 More good news in 2023.

Stocks keep rising as the S&P 500 nears its all-time high of about 4,800. Inflation keeps falling. And now, wages are starting to pick up their slack.

Our Chart of the Day shows how American workers’ earnings grew 4.2% in the past 12 months, meaning Big, Bad Inflation, hasn’t canceled out raises for the first time in over two years.

Everything from groceries to gas to rent still feels expensive, but at least it seems like we’ve turned a corner.

— Matthew

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• AT&T’s malaise as telecom stocks keep sliding

• Have Tech stocks outperformed too much?

• Why few pilots want to be promoted to captain

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🧠 Have Tech Stocks Outperformed Too Much? (FT) 🧑‍✈️

As investments, big tech has literally been too good. Many of the largest investment funds face restrictions on further purchases of leading stocks, namely Apple, Microsoft, Alphabet, and Nvidia, due to diversification rules.

At the center of the drama: The Nasdaq 100 index, which is rebalancing to reduce the dominance of certain large tech companies.

• See, stock indexes like the Nasdaq 100 or S&P 500 set benchmarks for many mutual funds and ETFs to follow, and they add weightings to the stocks in their indexes largely based on companies’ market values.
  

• As a stock’s price goes up, the greater weight it takes up in an index, causing investment funds tracking the index to buy more of its shares, resulting in that stock taking up a greater share of funds’ portfolios.

Given how dramatically America’s biggest tech companies have outperformed the rest of the stock market in recent years, investment funds are now bumping up against regulatory limits determining whether a fund can be labeled as “diversified” thanks to the concentration in a few big tech stocks.

• The S&P 500 has risen 18% this year, but just seven tech companies have accounted for most of those gains.

Diversified enough? Mutual funds registered as “diversified” with the Securities and Exchange Commission cannot hold more than 25% of their portfolios in investments known as “large holdings” — stocks comprising over 5% of the fund’s portfolio at the time of investment. So having five or more large holdings in a portfolio can put funds over the 25% diversification limit.

• If the 25% threshold is crossed, funds cannot buy any more stocks considered large holdings.
  

• At the end of May, for example, Fidelity’s $108 billion Contrafund had to pause buying Meta, Berkshire Hathaway, Microsoft, and Amazon, after they held a combined 32% weight in its portfolio.

Why it matters:

While regulators aren’t expected to enforce the rule against passive investment funds, those that strictly track a benchmark index, the worry is that while in breach of these regulations, funds may be exposed to legal action from investors.

• One lawyer commented, “A plaintiff would argue that the fund didn’t get shareholder approval to become non-diversified, and as a result made a material misstatement in its registration statement which caused harm to shareholders.”

Index shake-up: In response to a concentration threshold recently crossed, Nasdaq announced changes to its Nasdaq 100 index that’ll be implemented next Monday. The combined weighting of the index’s six largest stocks will be cut down from 50% to 40%, helping funds that track the index.

• The challenge, though, is that the best-performing stocks are essentially punished for that outperformance, while all other stocks in the index will see their weightings increase due to the reweighting.
  

• It’s a bizarre situation making the index’s future performance less representative of the universe of stocks it tracks by market value, spurred by the hugely lopsided performance of just a few companies.

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☠️ AT&T Shares Fall to Lowest Price Since 1993 (WSJ)

AT&T isn’t the power it once was. Just glance at its share price, which has fallen to its lowest level since 1993.

Telecommunications stocks continue to slide after an investigation found some big players were responsible for toxic lead cables.

• The telecom companies like AT&T have left behind more than 2,000 lead-encased cables across the U.S. They’re relics of the old Bell System’s regional telephone network, long before the days of iPhones.
  

• But telecom stocks haven’t been hampered by toxic cables alone. Their stocks have fallen drastically in recent years because of a sharp decline in traditional cable TV subscribers and the drastic decline in the use of landlines.

In 2004, more than 90% of U.S. adults lived in households with landline phones. Now, it’s less than 30% and falling. Big companies like AT&T haven’t made enough through cellular service to compensate for the losses.

Final straw: Said one analyst: “Investors were already sour on AT&T’s long-term prospects because of cord cutting, and this lead-cable story could be the straw that broke the camel’s back.”

• Other analysts have raised questions about liabilities related to the lead cables and their impact on companies’ bottom lines.
  

• Noted one: “It’s really the fear of the unknown. It’s very difficult to quantify how much of this network is out there. It’s difficult to quantify the cost. It’s difficult to quantify the liability.”

Telecom stocks are in freefall this month, with AT&T, Verizon, Frontier, and Lumen together losing about $36 billion in market value since The Wall Street Journal’s lead-cable investigation.

Why it matters:

Removing all the lead-cased copper wires nationwide could cost the U.S. as much as $59 billion. Will any take responsibility?

They’ll have that opportunity in the coming weeks when they report quarterly earnings results. Analysts and investors will want to hear from management in the investigation's aftermath. Verizon and AT&T are due to report earnings next week, while Lumen and Frontier are the week after.

• Noted an analyst: “The carriers have not made much of a statement, unfortunately. Hopefully, they will correct this on their earnings calls next week and be able to get investors some color on what the exposure is from a network perspective.” 
  

• The analyst believes the costs for removing lead cables are roughly $4,000 per mile of cable, including environmental remediation, though some analysts say it could be much more costly.

Overhang: “The industry’s historical use of lead sheathed cabling is likely to remain an overhang for the stocks and valuation for at least a few months and potentially longer until the market can better measure the financial risk,” Citigroup wrote in a report.

MORE HEADLINES

📈 Stocks keep rising amid better-than-expected earnings

😴 Morgan Stanley’s lower profits show trading and investment banking remain in the doldrums

🗣️ U.S. plans to limit investment in China will be “narrowly focused”

🎤 Taylor Swift is the first female artist to have four albums simultaneously on Billboard’s Top 10 chart

🧑‍✈️ U.S. Airlines Struggle as Pilots Avoid Promotion (Reuters)

Who would refuse a promotion when offered? Apparently, it’s more common than you’d think, at least on airlines.

Major commercial airlines like United Airlines and American Airlines face a dilemma: Pilots rejecting promotions to the captain's position.

Senior first officers at United avoid promotions to junior captain positions to preserve their seniority and minimize disruptions to their personal lives by keeping a predictable schedule. Some even decline a 40% salary increase.

• Analysts say there could be a captain storage that would impact flight schedules, likely contributing to cancellations and passenger frustration. A former airline exec quipped, “You can’t fly with two first officers.”

• Data from United’s pilot union reveals about 978 captain positions at the airline remained vacant over the past year, accounting for roughly 50% of the posted positions. In June alone, 96 of 198 openings went vacant.
  

• The number of pilots refusing promotions has at least doubled over the past seven years, according to a spokesperson for American Airlines’ pilot union. Over 7,000 pilots at American haven’t accepted captain positions.

It’s a difficult situation amid growing demand for pilots worldwide, especially in Asia-Pacific and North America.

Why it matters:

A first officer plays a crucial role in navigating and operating flights, while a captain serves as the pilot in command, assuming responsibility for the safety of the aircraft. Though both positions are unionized, they belong to distinct categories and feature varying pay rates.

• While the captain's pay is higher, junior captains face greater risks with unpredictable schedules, increased on-call duty, and short-notice assignments, impacting their personal lives. Seniority provides more schedule certainty.

Ahead of its scheduled earnings report on Wednesday, United has made efforts to incentivize pilots to accept junior captain roles through a new pilot deal.

• The proposed agreement includes attractive benefits such as premium pay, more days off, and limitations on involuntary assignments and certain standby duties.

The shortage is labeled as the "no one wants to be a junior captain syndrome.” If pilots continue declining captain positions, major airlines could follow smaller carriers’ approach: Reduce flight schedules by up to 20%.

That could create all sorts of havoc this year amid record travel demand.

See you next time!

That's it for today on We Study Markets!

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