Tech giants’ epic stock rally is far outpacing their gains, and that could mean the S&P 500 is looking more vulnerable, said Torsten Sløk, chief economist at Apollo Global Management.
In a note on Sunday, he pointed out that the top 10 companies in the S&P 500 account for 35% of the index’s market value but only 23% of its profits.
“This divergence has never been greater, suggesting that the market is record bullish on future earnings of the top 10 companies in the index,” Sløk wrote. “In other words, the problem for the S&P 500 today is not just the high concentration, but also the record-high bullishness about future earnings of a small group of companies.”
Because the S&P 500 is weighted by market capitalization, the rising stock prices of Big Tech companies jumping into the AI boom have resulted in recent gains being concentrated in just a handful of stocks, leaving relative mediocrity for the rest of the index is hidden from view.
Before Nvidia began its sell-off earlier this month, the AI chip leader was responsible for more than a third of the S&P 500’s rally this year.
“Such high concentration means that if Nvidia keeps going up, everything is fine,” Sløk warned on June 12. “But if concentration starts to fall, the S&P 500 will be hit hard.”
As market leadership becomes more concentrated, investor portfolios are becoming more popular, largely because it is becoming increasingly popular to invest money in funds that track indexes.
Bank of America analysts said in a recent note that the average large-cap fund has 33% of its portfolio in its top five investments, compared to just 26% in December 2022.
Similarly, the share of funds that have more than 40% of their portfolio in their top five holdings has risen from less than 5% in December 2022 to 25%.
Meanwhile, Wall Street analysts are bullish on the S&P 500 and are doing their best to raise their full-year targets. Even one of the biggest bears has surrendered and is now one of the most optimistic analysts.
And Tom Lee, co-founder of Fundstrat Global Advisors, recently said the S&P 500 could hit 15,000 by the end of the decade. He’s not the only Wall Street bull making bold predictions.
Ed Yardeni has been on the table about a new “Roaring Twenties” supercycle, saying the S&P 500 could jump to 6,000 next year. By the end of the decade, he said the stock index could hit 8,000.
This story originally appeared on Fortune.com
