There are three U.S. stocks that make up more than 20% of the value of the S&P 500 for the first time since at least 2000. These are Microsoft Corp., Nvidia Corp., and Apple Inc.
According to data from Bespoke Investment Group, this means that just three stocks in the index are worth more than all of its other components put together.
Some historical data shows that higher concentration is usually accompanied by better returns for the S&P 500 SPX. However, the quick rise in value of a few of the biggest stocks is starting to worry some investors, even those who were generally bullish until recently.
MarketWatch got a report on Thursday from Katie Stockton, founder of Fairlead Strategies. It said, “Strength in Nvidia and other megacaps has hidden weakness in many other areas of the market.” Stockton says that everything from small caps to midcaps to the Dow Jones Industrial Average (DJIA) and the equal-weighted version of the S&P 500 (XX:SP500EW) is getting worse.
There are many examples of this. Take a look at the Russell 2000 RUT to S&P 500 ratio. This week, it hit its lowest level since 2001, according to FactSet data.
If you look at the difference in prices between the equal-weighted S&P 500 and its cap-weighted counterpart, it has become even bigger as the equal-weight index has failed to perform this year. Analysts at BofA Global Research say that the ratio between the two has been at its lowest level since 2009 not long ago.
It is even more concentrated in the tech-heavy Nasdaq-100 NDX than it is in the S&P 500. For the first time since November 2023, Microsoft MSFT, +0.12%, Nvidia NVDA, -1.18%, and Apple AAPL, -0.71% made up 41% of the Nasdaq-100’s value at the end of the trading day on Wednesday.
A common complaint from people who don’t believe in bull markets is that so few stocks have contributed so much to the gains in the indexes. Many people think that if the rally ends, it will be because stocks like Nvidia, which have been responsible for a large part of the S&P 500’s gains since the beginning of 2023, stop going up.
Wednesday, when Nvidia passed Apple as the second-largest U.S. stock and crossed the $3 trillion mark, those worries seemed to come true again.
The number of S&P 500 stocks that have done better than the index has stayed unusually low in 2024, at about 30%, according to FactSet data. Richard Bernstein Advisors showed this with a chart in an X post that went viral. As of Thursday night, the S&P 500 was up 12.2% for the year.
The last time so few stocks did better than the index for two years in a row was around the height of the dot-com bubble, in 1998 and 1999, RBA said.
There isn’t much that investors could say about how the current market is like the dot-com era. The biggest stocks have a lot of power because their earnings and sales have grown much faster than those of other companies.
See Also : Nvidia’s Stock Drops After Reaching a $3 Trillion Mark
But the market is always looking ahead, and some people aren’t sure how long companies like Nvidia can keep growing at such a fast rate. At the end of the day, semiconductor companies have been very cyclical in the past, RBA’s Richard Bernstein told MarketWatch on Thursday.
Bernstein thinks that Nvidia’s shares are probably too expensive because the company probably won’t be able to keep beating Wall Street’s earnings growth estimates forever, or even for a very long time. On the other hand, investors probably haven’t given enough credit to shares of other large-cap index members.
According to FactSet, earnings-per-share growth will likely slow in the second half of the year for the 10 biggest stocks in the S&P 500. However, growth will speed up for the rest of the companies in the index as a whole.
Bernstein pointed out that more than 160 companies in the S&P 500 already saw their trailing 12-month net income rise by 25% or more in the first quarter of 2024. This is a much slower rate than Nvidia’s, but it is still higher than many other megacap names, such as Microsoft.
Bernstein thinks that this presents an opportunity for investors in the “Magnificent Seven” and other large-cap stocks to fall while the market as a whole rises. Investors have already seen hints of this in 2024, when Apple Inc. and Tesla Inc. TSLA, +1.68% stocks did not do well.
For months, he has also been telling investors to look for deals in other parts of the world’s stock market, such as U.S. small caps and emerging-market stocks. Once the Federal Reserve starts lowering interest rates, analysts think that both of these areas could get a boost.
Berstein said, “It’s like a seesaw.” “In the world’s stock market, seven stocks are on one side and everything else is on the other.” You don’t have to choose for the next 10 minutes. You can choose for the next 10 quarters or the next 10 years.
He also said, “I think you want to be on the other side of that seesaw.”
The S&P 500 and Nasdaq Composite COMP both ended the day with small losses. However, gains in consumer-discretionary, energy, and consumer staples stocks helped to balance out losses in Nvidia and other semiconductor names.
The Dow Jones Industrial Average ended the day higher thanks to rising shares of Salesforce Inc. CRM, +2.63%, which had dropped after the company reported earnings last week.
