These 5 stocks account for 63% of S&P 500 returns so far this year. Can their dominance continue?

We’re officially halfway through 2024 and it’s shaping up to be another great year for stock investors.

The S&P 500 delivered a total return of 15.3% through the end of June. That is more than double the historical average for the first half of the year. The continued push to new record highs also bodes well for the second half of the year.

If you look under the hood, the vast majority of the S&P 500’s returns in the first half of 2024 have been driven by just five stocks. The list isn’t all that different from the group of stocks that have been responsible for the bulk of 2023 returns. If you’re familiar with the “Magnificent Seven,” you’ll recognize these names. Can these five continue their dominance for the rest of the year?

The Five Stocks That Will Drive 63% of the S&P 500’s Returns in 2024

The total market capitalization of the S&P 500 grew by $5.8 trillion in the first half of 2024.

The following five stocks generated the biggest market cap gains through the first six months of the year and account for about 63% of the S&P 500’s gain through 2024.

Data source: YCharts.

All of these companies were already among the largest components of the S&P 500 to start the year. Nvidia’s continued dominance of the AI ​​chip market has led to a massive surge in its stock value. Meanwhile, Microsoft, Alphabet, Amazon and Meta are four of the largest companies investing in the development of advanced artificial intelligence. Microsoft, Alphabet and Amazon also provide the cloud platforms needed to train and run AI-powered applications.

The current trend toward generative AI favors the largest companies. Building large data centers capable of training large language models and running inferences all day long requires a lot of capital. Meta is leading the pack with its plan to spend between $35 billion and $40 billion on capital expenditures this year. That’s an investment that even smaller companies can’t compete with, especially in today’s interest rate environment where debt isn’t nearly as cheap as it used to be.

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As a result, the S&P 500 has become increasingly concentrated in just a few companies. Microsoft, Nvidia and Apple good for 20% of the index’s value. The next seven components add another 16%. We haven’t seen this level of concentration among the top 10 companies in the S&P 500 since the 1970s.

While there are good reasons for the current level of concentration, investors must ask whether these giant companies can continue to lead the market.

Who will take the next step into the market?

The increasing concentration in the stock market is not necessarily a concern. As mentioned, there are good reasons why the largest companies have become larger. But investors should remain aware of valuations and where the market offers good value.

For example, Nvidia trades for a forward PE of around 47. That makes it a risky bet on its continued dominance of the AI ​​chip market. It faces challenges from other chipmakers, and its biggest customers are designing their own chips to reduce their reliance on Nvidia. Analysts currently expect strong bottom-line growth for Nvidia, but its high valuation makes any shortfall extremely damaging to the stock.

Not every member of the above group is expensive. Meta Platforms and Alphabet trade for forward PEs around 25x. While those valuations are higher than the overall S&P 500 earnings multiple, they’re not excessive multiples relative to their earnings growth prospects.

Looking beyond the largest companies can provide many more opportunities for investors. The S&P 500 equal-weight index has historically outperformed the cap-weighted index over the long term. Smaller companies tend to grow faster than the giants at the top of the market. A $1 billion increase in the market cap of a $10 billion company is a 10% increase. The same amount of inflows into a $1 trillion company is a 0.1% increase.

To make a bigger bet on the other 495 companies in the S&P 500, investors would Invesco S&P 500 ETF with equal weight (NYSEMKT: RSP)Investors could also diversify outside the S&P 500 using a small-cap ETF, such as the iShares Russell 2000 ETF (NYSEMKT: IWM).

While a small number of large growth stocks still dominated the first half of the year, the next move into the market could come from a large number of smaller companies.

Should You Invest $1,000 in Nvidia Now?

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Randi Zuckerberg, former chief marketer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Amazon, Meta Platforms and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

These 5 Stocks Have Accounted for 63% of the S&P 500’s Returns So Far This Year. Can Their Dominance Continue? was originally published by The Motley Fool