A slow week in news hasn’t stopped bulls from stoking the stock market to new highs, but the number of stocks driving prices higher is becoming increasingly fewer.
The S&P 600 and NASDAQ are hitting new highs every day and every week. But beneath the surface, almost all of the gains are being driven by 10 stocks in the technology sector. Many investors thought the rally would never end and continued to invest in the Magnificent Seven and the AI ​​Five. Leading the rush is everyone’s favorite stock: Nvidia.
The semiconductor giant is currently valued at more than $3.35 trillion. It is currently the most valuable company in the S&P 500 index, and some analysts are predicting the company’s valuation to rise to $5 trillion over the next 12 months.
Traders were confident the company’s stock would take a breather after its 1-for-10 stock split on May 22, but that didn’t happen. Shares have been climbing almost every day since. Bulls have even given the semiconductor giant a new nickname: “evergreen” because shares barely go a day without a downturn.
Nvida and several other stocks, including Microsoft, Apple, Netflix, Broadcom, Google, and Meta, currently make up a large portion of the NASDAQ 100 and S&P 500 indexes, so when these stocks move, so does the market. In comparison, the performance of almost every other stock is dismal. Why only AI stocks and their ilk?
Part of the appeal is that Wall Street can justify buying these stocks at any price because when it comes to the future of artificial intelligence, the possibilities are endless. Any technology company can claim to be in AI or will soon claim a higher valuation. It reminds me of the days when just adding a dot com to a company name would send a stock price soaring.
Stock analysts around the world continue to raise their predictions for how much companies will spend on AI in the coming years. To them, the Internet boom was nothing compared to what’s unfolding in the world of AI. There’s no way to prove (or disprove) these predictions.
On Friday, Nvidia’s weighting in the $71 billion Technology Select Sector SPDR exchange-traded fund (symbol XLK) was expected to increase significantly as the fund rebalances. That extra buying power by XLK has boosted shares this week on hopes.
So compared to AI, the rest of the stock market is a boring place. With all the movement in stocks like Nvidia, why buy anything else? But for me, it’s an increasingly risky bet relying on the bigger fool theory that someone else will always buy my stock at a higher price.
Meanwhile, the broader market is being buoyed by traders who are convinced the Fed will need to cut interest rates multiple times before the end of the year. Of course, the Fed continues to say “no way.” Over the past two weeks, members of the Federal Open Market Committee have been warning financial markets that they have no plans to cut interest rates anytime soon.
Traders don’t believe it. Bulls are confident that the central bank will soon realize that inflation is trending downwards, unemployment is rising and growth is slowing. Data has yet to back up these assumptions, but animal minds tend to ignore facts in favor of price momentum. Unless the Fed unequivocally says “no rate cuts this year,” markets will hear what they want to hear. In the meantime, the idea that a rate cut is on the horizon will continue to drive bullish sentiment — unless and until one comes along.
The market is stretched but everyone knows it and is ignoring it. Seasonally, it is a bullish time for the market. I am riding the market rally but am unwinding positions as stocks rise. I expect the market to pull back at any moment so be prepared. It won’t be more than a 3-5% drop but it will feel a lot worse. I think we will then see a recovery before we see an even sharper drop in July.
Bill Schmick is listed as an investment advisor representative for Berkshire Onota Partners Inc. He can be reached at 413-347-2401 or by email at billiams1948@gmail.com.
