This year’s stock market rally was led by a few big tech names — but that may not be a bad thing.
Yahoo Finance’s Josh Schaeffer has the scoop:
“We see a small group of technology winners driving stock gains as a feature of the AI theme — not a bug,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a research note on Monday. “We are still overweight in US stocks.”
AI darling Nvidia (NVDA) has accounted for nearly a third of the S&P 500’s gains this year, and the outperformance in quarterly results from the large-cap technology continues to be the reason behind the S&P 500’s earnings growth year over year.
As of Monday’s close, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Broadcom (AVGO) also contributed more than a quarter of the benchmark index’s gains.
One potential concern is that the market could be in danger if a few of the big tech companies that have led the lion’s share of the gains stop surprising to the upside.
However, research by Mike Wilson, chief investment officer at Morgan Stanley, shows that this may not be a problem.
Wilson finds that roughly 20% of the top 500 stocks outperform the broader index over a one-month rolling period. This is the lowest proportion of outperforming firms in the Wilson data set dating back to 1965.
Wilson’s work noted that after similarly broad readings where less than 35% of companies outperformed the index on a one-month basis, the S&P 500 rose about 4% on average over the next six months.
“The narrow range could persist, but it’s not necessarily a headwind to returns per se,” Wilson said. “We think the expansion is likely to be limited to high-quality/large-cap pockets for now.”
When you consider the impact of higher interest rates on companies, this makes sense, Wilson said. Investors have dumped large-cap stocks that have held up well in a high-rate environment and are seeing higher earnings growth than their smaller peers.
A slew of recent upgrades to the S&P 500’s year-end targets reflect similar sentiments. Three Wall Street firms cited the outperformance of technology as part of the reason the index is performing better than they initially thought this year.
