How does the overall market influence individual stocks?

The performance of the overall market has a strong influence on individual stocks because markets are interconnected systems driven by broad investor sentiment, economic forces, and institutional behaviour. Even if an individual company is doing well, its stock may still fall (or rise) just because the overall market is falling (or rising).

Here’s a breakdown of why that happens:

1.Market-Wide Factors Affect All Stocks

Certain forces affect all companies, regardless of their sector or strength:

Examples:

Interest rate hikes: Make borrowing more expensive for all businesses and lower consumer spending.

Inflation: Raises costs and compresses profit margins across industries.

Recession fears: Leads investors to assume profits will fall across the board.

So when the overall market drops, it’s often a reaction to macro-level risks that apply to virtually every company to some degree. That causes broad-based selling.

2.Investor Psychology & Sentiment

When the market is falling, fear takes over—and it spreads quickly:

Investors often sell indiscriminately in downturns (panic selling), even if a particular company is unaffected.

During rallies, optimism causes investors to buy broadly, lifting even average-performing stocks.

This is driven by herd behaviour.

3.Index Inclusion & Passive Investing

A huge portion of today’s investing is done via index funds and ETFs, which buy and sell stocks based on their index weight, not fundamentals.

For example:

When investors pour money into the and ETF which tracks the ASX 200, the fund automatically buys every company in the index regardless of the performance of the individual stock.

When investors start to sell out of the share market, those funds sell shares across the board, pushing down individual stocks even if they’re performing well.

So, the structure of modern investing links individual stock movements closely to overall market direction.

4.Institutional Portfolio Management

Big institutions like super funds and hedge funds manage risk at the portfolio level, not just individual stock level.

When the market outlook worsens:

They reduce their overall equity exposure which means selling across the board.

They may also reallocate from stocks to safer assets (like bonds or cash), which pushes individual stock prices down.

This behaviour ties individual stock performance to broader asset allocation decisions, not just company performance.

5.Sector and Peer Group Correlation

Even if a company is solid, it may fall because:

It’s in a sector that’s out of favour (e.g., tech during rising interest rates).

Its peers are underperforming, and investors assume similar risks apply.

6.Liquidity & Volatility During Market Moves

When the overall market drops sharply:

Liquidity dries up—fewer buyers are willing to step in.

Even strong stocks can fall simply because sellers need cash quickly (e.g., for margin calls or redemptions).

High volatility triggers automatic trading algorithms, which often sell in waves, adding pressure on all stocks.

Lauren Hua is a private client adviser at Fairmont Equities.

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