This year’s stock market rally has been led by just a few big tech names.
While it may seem overwhelming for some stocks, strategists say the trend may not be a problem for the market.
“We see a small group of technology winners whose stock gains are a feature of the artificial intelligence (AI) theme – not a flaw,” wrote Jean Boivin, head of BlackRock Investment Institute, in a research note on Monday. “We remain overweight on 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 monthly returns from large-cap technology continues to be the reason why the S&P 500’s earnings have increased year over year.
As of Monday’s close, Apple ( AAPL ), Alphabet ( GOOG , GOOGL ), Microsoft ( MSFT ), Amazon ( AMZN ), Meta ( META ), and Broadcom ( AVGO ) had also contributed more than a quarter of the major index’s gains.
One potential concern is that the market could become risky if some of the big tech companies that have been driving a large portion of the gains stop by surprise.
However, research from Morgan Stanley’s chief investment officer, Mike Wilson, suggests that this is not a problem.
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 leading companies in the Wilson dataset since 1965.
Wilson’s work noted that after reading the same breadth, less than 35% of companies outperformed the index on a one-month basis, the S&P 500 rose by an average of 4% over the next six months.
“Narrows can stay but it doesn’t have to be a big wind to continue back and forth,” Wilson said. “We believe the broadening will likely be limited to high quality/large cap pockets for now.”
Wilson argues that when considering the impact of high interest rates on companies, this is understandable. Investors have flocked to large-cap stocks that have held up well in a higher-rate environment and are seeing more earnings than their smaller peers.
And many of the recent upgrades to S&P 500 targets last year reflect similar sentiments. Three Wall Street firms cited technology’s performance as part of the reason the index did better than expected this year.
Evercore ISI’s Julian Emanuel raised his target to 6,000 from 4,750, citing “AI’s early innings” and a market supported by “the persistence of AI exuberance.” Citi’s Scott Chronert raised its year-end target to 5,600 from 5,100 by noting “the weighted effect of the mega cap growth cohort has a significant impact on the index’s price action.”
Goldman Sachs’ equity strategy team boosted its year-end target to 5,600 from 5,200, highlighting that increasing earnings expectations for Alphabet, Microsoft, Amazon, Meta, and Nvidia have “offset the typical pattern of negative revisions to consensus EPS estimates.”
“We underappreciated the degree that earnings will lift some stocks and the degree that some stocks will drive the rest of the market, and that’s basically what we set for,” Goldman Sachs equity strategy Ben Snider told Yahoo Finance.
Goldman Sachs provides an alternative scenario for a base case call for 5,600 in the S&P 500, where the benchmark rises to 6,300 by the end of the year. This, the Goldman team wrote, will be driven by “more mega-cap exceptionalism.”
Snider told Yahoo Finance that this is likely to come from the company’s “continued revenue beat relative to what analysts expect.” Snider added that this scenario leaves investors “vulnerable” to some stocks beating expectations. But it still comes with an upside.
“The beauty of owning the S&P 500 index in general, is that when some companies do well, it can drag down the entire index,” Snider said. “And we’re seeing it now. So I think most investors who own the S&P 500 are very happy with what’s going on, even if it means their portfolios are basically more concentrated,” Snider said.
Josh Schafer is a reporter for Yahoo Finance. Follow him in X @_joshschafer.
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