The stock market’s rally this year has been driven by just a few big technology companies, but that may not be such a bad thing.
Yahoo Finance’s Josh Schafer has the scoop:
“We see the rise being driven by a small number of tech stocks as a feature of the AI theme, not a flaw,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a research note on Monday. “We remain overweight U.S. equities.”
AI darling Nvidia (NVDA) has accounted for nearly a third of the S&P 500’s gains this year, and strong quarterly results from big tech companies are the reason why the S&P 500’s revenues continue to grow year over year.
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 indexes’ gains.
One potential concern is that the market could be at risk if a few big technology companies that have driven much of the stock market rally stop surprising investors with their stock prices rising.
But research from Morgan Stanley Chief Investment Officer Mike Wilson suggests that may not be a problem.
Wilson found that about 20% of the top 500 stocks beat the broader index over a one-month period, the lowest percentage of companies that outperformed the broader index in his data, which dates back to 1965.
Wilson’s research shows that after a similarly narrow range of readings, in which fewer than 35% of companies outperform the index on a one-month basis, the S&P 500 rose an average of about 4% over the following six months.
“While a narrow range may persist, that in itself is not necessarily a headwind for future returns,” Wilson said. “We think any broadening in the range is likely to be limited to high quality/large cap stocks for the time being.”
Wilson argued that this makes sense given how high interest rates affect companies: Investors are flocking to larger market-cap stocks that have held up in a high-rate environment and are growing earnings faster than their smaller peers.
And a series of recent upward revisions to end-of-year S&P 500 index targets reflects similar sentiments. Three Wall Street firms cited tech strength as one reason the index is performing better this year than initially thought.
