Market Rally Driven by Concentrated Gains in Tech Stocks, Despite Bubble Concerns
The stock market has been on a relentless rally, with the S&P 500 surging nearly 25% from its October lows. However, this surge has been fueled by gains in only a handful of stocks, leading some on Wall Street to raise concerns about a potential bubble. Despite these concerns, top Wall Street strategists believe that the market will continue to rise.
One of the leading stocks driving this rally is Nvidia, a favorite among artificial intelligence (AI) investors. Since the start of the year, Nvidia’s stock has gained more than 80%, contributing to the record levels of the S&P 500 and Nasdaq. The concentration of gains in a few stocks has caused market concentration to reach a multi-decade high. According to Goldman Sachs data, the 10 largest US stocks now account for 33% of the S&P 500 market cap and 25% of S&P 500 earnings.
However, some experts argue that concerns over narrow market participation and frothiness may be misguided. Citi US Equity Strategy Director Drew Petit believes that the market is healthier than people give it credit for. He dismisses the bubble fear as a “sell side trick” and sees reason to believe that the market will continue to rise.
Strong quarterly results from big tech companies have also bolstered the bull case. Nvidia, Meta, Microsoft, and Amazon all posted impressive earnings, exceeding expectations. The surge in demand for AI technology has been a driving force behind Nvidia’s success. Wedbush analyst Dan Ives describes the current market environment as a “1995 moment” rather than a repeat of the dotcom bubble. He points out that the sky-high valuations and weak business models that characterized the dotcom era are not present today.
Citi’s head of US semiconductor research, Chris Danely, shares Ives’s bullish view on tech stocks. He sees no end in sight for their growth and believes that it is too early to sound the alarm bells. Danely’s optimism is supported by positive underlying trends in the market. Market breadth, which indicates bullish sentiment, has slowly started to improve. The S&P 500 equal weight index and small caps have outperformed the S&P 500 in the past month.
Charles Schwab’s Liz Ann Sonders emphasizes that the broadening out of the market is happening in a stealthy way and sees it as a positive development. She believes that the churn under the surface is not a bad thing and indicates a healthy market.
It is also worth noting that historical data suggests that elevated market concentration does not necessarily indicate a market top. Goldman Sachs analyzed market concentrations over the past 100 years and found that the S&P 500 rallied more often than not following concentration peaks. This supports the view that a “catch up” by laggards is more likely to interrupt the ongoing momentum rally than a decline by recent market leaders.
In conclusion, while concerns about a potential bubble in the stock market persist, top Wall Street strategists remain optimistic. The concentrated gains in tech stocks have been a driving force behind the market rally, with Nvidia leading the charge. Strong quarterly results from big tech companies and positive underlying trends suggest that the market will continue to rise. While caution is always warranted, history shows that elevated market concentration does not necessarily lead to a market top.