This year’s stock market rally has been led by just a few big tech companies.
While over-reliance on some stocks may be a concern, strategists say this trend may not be bad for the market.
Jean Boivin, president of BlackRock Investment Institute, said in a research note on Monday: “The fact that a small number of tech winners are leading the stock rally is a feature of the artificial intelligence (AI) theme, not a flaw. We believe that there is no such thing.” “We remain overweight in U.S. stocks.”
AI darling Nvidia (NVDA) has accounted for nearly a third of the S&P 500’s gains this year, and continues to outperform large tech companies in quarterly results as S&P 500 profits rise year over year. It is the reason why I am here.
As of Monday’s close, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Broadcom (AVGO) also accounted for more than a quarter of the major index’s gains. was contributing.
One potential concern is that the market could be at risk if the few big tech companies that have been driving most of the gains end their unexpected rally.
But research by Morgan Stanley Chief Investment Officer Mike Wilson suggests that this may not be the case.
Wilson found that about 20% of the top 500 stocks outperformed the broader index over a one-month period. This is the lowest percentage of high-performing companies in Wilson’s dataset dating back to 1965.
Wilson’s research noted that the S&P 500 index averaged about 4% higher over the next six months, after a similarly narrow measurement with fewer than 35% of companies outperforming the index on a monthly basis. .
“We may continue to see a narrow band, but that in and of itself is not necessarily a headwind for forward returns,” Wilson said. “For now, we believe expansion is likely to be limited to high quality/large cap pockets.”
Wilson argued that this makes sense given the impact high interest rates have on businesses. Investors are flocking to large-cap stocks, which hold up well in a high-interest-rate environment and grow profits faster than small-cap stocks.
A number of recent increases to year-end S&P 500 targets also reflect similar sentiments. Three Wall Street firms cited the outperformance of tech companies as part of the reason the index is performing better this year than originally expected.
Evercore ISI’s Julien Emanuel raised his target from 4,750 to 6,000, citing a market supported by the “early stages of AI” and “continued vibrancy in AI.” Citi’s Scott Kronert pointed out that the weighting effect of the large-cap growth cohort has a significant impact on the index’s price movement, and raised his year-end target from 5,100 to 5,600.
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Goldman Sachs’ equity strategy team raised its year-end target to 5,600 from 5,200, saying higher earnings expectations for Alphabet, Microsoft, Amazon, Meta, and Nvidia “offset the typical pattern of negative consensus EPS estimate revisions.” “There is,” he emphasized.
Ben Snyder, an equity strategist at Goldman Sachs, told Yahoo Finance: “How much do these gains boost those few stocks, and how much do those few stocks lift the rest of the market? “We underestimated how much it would push. That’s basically what we’re adjusting to.” .
Goldman Sachs has laid out an alternative to its base scenario call for the S&P 500 index of 5,600, where the benchmark jumps to 6,300 by the end of the year. Goldman’s team wrote that this will be driven by “further mega-cap exceptionalism.”
Snyder told Yahoo Finance that this possibility is likely driven by “continued outperformance of earnings from these companies relative to analyst expectations.” Snyder added that such a scenario would leave investors “vulnerable” to some stocks outperforming expectations. However, there are still positive aspects.
“The beauty of owning the S&P 500 in general is that if a few companies do really well, it can push the whole index up,” Snyder said. “And we’re seeing it now. So most investors who own the S&P 500 are very, very happy with what happened, even if it means their underlying portfolios become more concentrated.” I think we’re happy with that,” Snyder said.
Traders work on the floor of the New York Stock Exchange during morning trading on May 17, 2024 in New York City. (Angela Weiss/AFP via Getty Images) (Angela Weiss/AFP via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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