This year’s stock market rally has been led by just a few big tech names, but that may not be such a bad thing.
Yahoo Finance’s Josh Schafer has the scoop:
“We see a small group of technology winners leading stock price gains as a hallmark of the artificial intelligence (AI) theme – and not as a bug,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a research note on Monday. “We remain overweight in US equities.”
AI darling Nvidia (NVDA) is responsible for nearly a third of the S&P 500’s profits this year, and the outperformance in large-cap tech’s quarterly results continues to be a reason why profits for the S&P 500 are growing year over year.
At Monday’s close, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Broadcom (AVGO) also contributed more than a quarter to the main index’s gains .
One potential concern is that the market could be in jeopardy if a few big tech companies, which have accounted for the lion’s share of profits, no longer surprise positively.
However, research from Mike Wilson, Morgan Stanley’s Chief Investment Officer, suggests this may not be a problem.
Wilson found that about 20% of the top 500 stocks outperform the broader index over a rolling one-month period. This is the lowest percentage of companies that outperform in Wilson’s data set going back to 1965.
Wilson’s work noted that after similar measurements on a limited scale, with fewer than 35% of companies outperforming the index on a monthly basis, the S&P 500 rose an average of about 4% over the next six months.
“Limited breadth may persist, but it is not necessarily a headwind for driving returns in and of itself,” Wilson said. “We think the broadening will be limited to high quality/large cap stocks for now.”
Wilson argued that this makes sense when we look at the impact of high interest rates on businesses. Investors have been flooding into large-cap stocks that have held up well in the higher interest rate environment and are seeing earnings growth faster than their smaller peers.
And a slew of recent upgrades to the S&P 500’s year-end targets reflect a similar sentiment. Three Wall Street companies cited technology outperformance as one of the reasons why the index is doing better this year than they initially thought.
