The stock market’s rally this year has been driven by just a few big technology companies.
While over-reliance on a few stocks may be a concern, strategists say the trend may not be a bad thing for the market.
“We see the rise being driven by a small number of tech stocks as a feature of the AI theme, not a flaw,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a research note on Monday. “We remain overweight U.S. equities.”
AI darling Nvidia (NVDA) has accounted for nearly a third of the S&P 500’s gains this year, and strong quarterly results from big tech companies are the reason why the S&P 500’s revenues continue to grow year over year.
As of Monday’s close, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Broadcom (AVGO) also accounted for more than a quarter of the major indexes’ gains.
One potential concern is that the market could be at risk if a few big technology companies that have driven much of the stock market rally stop surprising investors with their stock prices rising.
But research from Morgan Stanley Chief Investment Officer Mike Wilson suggests that may not be a problem.
Wilson found that about 20% of the top 500 stocks beat the broader index over a one-month period, the lowest percentage of companies that outperformed the broader index in his data, which dates back to 1965.
Wilson’s research shows that after a similarly narrow range of readings, in which fewer than 35% of companies outperform the index on a one-month basis, the S&P 500 rose an average of about 4% over the following six months.
“While a narrow range may persist, that in itself is not necessarily a headwind for future returns,” Wilson said. “We think any broadening in the range is likely to be limited to high quality/large cap stocks for the time being.”
Wilson argued that this makes sense given how high interest rates affect companies: Investors are flocking to larger market-cap stocks that have held up in a high-rate environment and are growing earnings faster than their smaller peers.
And a series of recent upward revisions to end-of-year S&P 500 index targets reflects similar sentiments. Three Wall Street firms cited tech strength as one reason the index is performing better this year than initially thought.
Julian Emanuel of Evercore ISI raised his price target to 6000 from 4750, citing a market buoyed by “the early stages of AI” and “continued enthusiasm for AI.” Citi’s Scott Cronath raised his year-end price target to 5600 from 5100, noting that “the weighting effect of the mega-cap growth cohort is having a significant impact on index price movement.”
Goldman Sachs’ equity strategy team highlighted that rising earnings estimates for Alphabet, Microsoft, Amazon, Meta and Nvidia “offset the typical pattern of downward revisions to consensus EPS estimates,” and raised their year-end target to 5,600 from 5,200.
“We underestimated how much these gains would boost a small number of stocks and how those small number of stocks would move the overall market. Essentially, we’re adjusting for that,” Ben Snyder, equity strategist at Goldman Sachs, told Yahoo Finance.
Goldman Sachs presented an alternative to its base case for the S&P 500 reaching 5,600 points, with the index surging to 6,300 points by the end of the year. The Goldman team wrote that this scenario would be driven by “further megacap exceptionalism.”
Snyder told Yahoo Finance that this is likely due to “continued earnings growth from these companies that beat analysts’ expectations,” adding that in such a scenario, investors would be “vulnerable” to a small number of stocks beating expectations. But there’s still room for upside.
“The beauty of owning the S&P 500 is that if a few companies do well, it can lift the entire index,” Snyder said. “And we’re seeing that right now. So I think most investors who own the S&P 500 are very happy with what’s happened, even if it means making their underlying portfolios more concentrated.”
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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