By Lewis Krauskopf
NEW YORK (Reuters) – A rally that has pushed U.S. stocks to record highs is increasingly relying on red-hot chipmaker Nvidia and a handful of other giant stocks, reviving concerns that the market’s performance has become tied to a cluster of companies.
About 60% of the S&P 500’s total return of over 12% for the year is attributable to five companies whose shares have some of the heaviest weightings in the index: Nvidia, Microsoft, Meta Platforms, Alphabet and Amazon.com, data from That showed the S&P Dow Jones indices.
Nvidia – which became the world’s second most valuable company on Wednesday after a 147% run this year – alone accounts for about a third of the index’s gains.
As companies’ stock prices have risen, their weightings in the S&P 500 have grown, giving them more influence on the broader index. The four largest stocks — Microsoft, Apple, Nvidia and Alphabet — accounted for nearly 24% of the S&P 500 at the end of May, the largest collective four-stock weighting in 60 years, according to Bianco Research.
Many investors believe the companies’ market power is justified, given their robust profits, dominant competitive positions and expectations that they will benefit from advances in the fast-growing field of artificial intelligence. But some worry that the concentration of profits in a handful of big companies could threaten the indexes if some of the big names start to wobble.
“If these names stop performing well… and we don’t see the rest of the market providing that support, that could potentially be a source of vulnerability,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
A look at the 10 largest stocks in the S&P 500 shows that their weightings ballooned to 34.1% at the end of May, the highest month-end weighting ever for the index’s top 10, according to Howard Silverblatt, senior index analyst at S&P. Dow Jones Indices.
Concerns about market concentration have arisen repeatedly in recent years. The S&P 500’s 24% gain in 2023 — as recession concerns drew investors to larger companies less exposed to the economy’s swings — was driven by eye-popping gains from a group of mega-cap tech and growth stocks called the “Magnificent Seven ‘ was named. While those stocks rose, large parts of the market remained tepid even though a recession did not materialize.
Signs of a broadening emerged in the first quarter of 2024, when the financial, energy and industrial sectors all outperformed the S&P 500. However, these groups have fallen in the second quarter even as the broad index has moved higher.
The equal-weighted S&P 500 — a measure of the average stock in the index — has pared previous gains and is up just 4.5% this year, compared with a 12% gain for the S&P 500.
“We were all excited about the broadening of the recovery,” said Jack Manley, global market strategist at JP Morgan Asset Management. “It seems like it has come to a standstill, at least in the first half of the year.”
Analysts cite a number of reasons for the market tightening, including the first-quarter earnings dominance of mega-cap tech companies and enthusiasm for companies benefiting from AI. Emerging concerns about an economic downturn – reflected in recent data such as a weaker US manufacturing report – could be another factor.
Meanwhile, Nvidia has continued to rise. Fueled by its position as the dominant AI chipmaker, Nvidia’s market value surpassed $3 trillion on Wednesday, as the company edged ahead of Apple in market capitalization, trailing only Microsoft.
The stock is up 29% since its big May 22 earnings report, while the S&P 500 is up 0.9% in that time. “Nvidia itself supported the tape,” said Michael O’Rourke, chief market strategist at JonesTrading. “That is a risk, because if there is a correction in that name… you will feel it in the market.”
Some investors believe that the concentration simply reflects the economic strength of the companies and is not in itself a cause for concern.
The mega-caps “are performing better because the results and outlook are strong,” said Peter Tuz, president of Chase Investment Counsel, although he added that gains from a broader group of stocks are often preferable because it reflects broader economic strength.
Others are optimistic that the market will widen again in the coming months, helped by improving gains from the rest of the S&P 500.
Magnificent Seven’s earnings are expected to rise about 27% in 2024, versus a 7.4% increase for the S&P 500 excluding these seven. This gap will narrow as the year progresses, said Tajinder Dhillon, senior research analyst at LSEG.
“That difference in profit and performance gains will continue to narrow,” said Kourkafas of Edward Jones. “Investors should not give up on the theme of broadening leadership this year.”
(Reporting by Lewis Krauskopf in New York; Editing by Ira Iosebashvili and Matthew Lewis)
