When I meet people and find out I’m a regular contributor here, the first question they usually ask me is, “Where are stocks going? Are they going up or down?”
I usually answer “both” — not particularly informative, but at least honest. But lately, people have been asking me a more specific question: “Should I be worried that a handful of stocks are driving the market to record highs?”
It’s a legitimate concern. According to research by Counterpoint Global’s Michael Maboussin and Dan Callahan, the “Magnificent Seven” — Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), Meta Platforms (META), Amazon (AMZN), and Tesla (TSLA) — are set to account for nearly three-quarters of the S&P 500’s gains this year and more than half of its gains in 2023. And those numbers would be even more skewed if you excluded TSLA, which isn’t currently riding the AI ​​boom and is facing its own challenges.
This seems like a dangerous level of concentration, and basic principles of mean reversion mean that it will soon be corrected. But there is another way that the disconnect between the performance of the big tech stocks and the rest of the market could narrow: instead of the market leader collapsing, the rest of the market could catch up and drive the index even higher. This may sound somewhat optimistic, but it’s not all that unreasonable when you consider what’s driving the gains.
I’ve been in the industry for years and I’m cynical enough to be wary of hyperbole, but it’s hard to argue that AI is a truly transformative technology that will change the business world. Once companies are able to fully realize the benefits of AI, it will lead to huge gains in efficiency and productivity. But we’re not there yet.
For now, the AI ​​revolution is more of a cost than a benefit for the other 490 or so companies in the S&P 500. These companies are putting their money behind a handful of companies that have developed the products they need to take advantage of advances in computer technology, leading to a disparity in performance.
But it’s an investment in the future. And at some point, AI adoption will transition from a cost to a benefit for technology buyers. When that happens, we’ll see a unified performance picture. This doesn’t mean that companies like NVDA and MSFT will take a big hit. Revenue growth may slow a bit, but the main driver of equilibrium will be better outcomes for AI users. In that scenario, the gap could be closed by major indexes rising instead of falling.
Of course, none of this is guaranteed, and the benefits of AI may be overstated, but there’s no denying that when employees can condense 150-page reports into 15-minute presentations in minutes instead of days or weeks, it translates into increased efficiency and profit margins — which translates into higher salaries and capital investments, which translates into economic growth.
With a handful of stocks driving the stock indexes higher, it may feel like we are heading for a collapse, but that is not necessarily the case. AI is truly revolutionary, and while its adoption is currently siphoning cash from the majority of companies and putting it in the hands of a handful of companies, the benefits of that investment will soon be felt by many, so there may be a happy ending after all.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
