The surge in share prices of big tech companies has far outpaced their profits, meaning the S&P 500 could look more vulnerable, according to Torsten Slok, chief economist at Apollo Global Management.
In a note on Sunday, he noted that the top 10 companies in the S&P 500 account for 35% of the index’s market capitalization but only 23% of its profits.
“This divergence is larger than ever, signaling that the market is at a record bullishness about the future earnings of the top 10 companies in the index,” Slok wrote. “In other words, the problem with the S&P 500 today is not just high concentration, but also record bullishness about future earnings from a small number of companies.”
Apollo Global Management
Because the S&P 500 is weighted by market capitalization, the recent surge in shares of big technology companies capitalizing on the AI ​​boom has concentrated the gains in just a handful of stocks, obscuring the relative mediocrity of the rest of the index.
Before Nvidia began selling off earlier this month, the AI ​​chip giant accounted for more than a third of the S&P 500’s gains this year.
“This level of concentration means that if Nvidia keeps going up, it’s OK,” Slok warned on June 12. “But if it starts to fall, the S&P 500 is going to take a big hit.”
As market leadership becomes more concentrated, so do investors’ portfolios, with putting money into funds that track indexes in particular becoming increasingly popular.
The average large-cap fund now holds 33% of its portfolio in the top five stocks, up from just 26% in December 2022, Bank of America analysts said in a recent report.
Similarly, the percentage of funds with more than 40% of their portfolios in the top five stocks jumped to 25% from less than 5% in December 2022.
Meanwhile, Wall Street analysts are bullish on the S&P 500 and are rushing to raise their year-end targets. Even one of the most bullish analysts has caved in and is now one of the most bullish.
And Tom Lee, co-founder of Fundstrat Global Advisors, recently said the S&P 500 could hit 15,000 in 10 years. And he’s not the only Wall Street bull making bold predictions.
Ed Yardeni is talking up a new “Roaring Twenties” super cycle and says the S&P 500 will jump to 6,000 by next year. He says the index could hit 8,000 in 10 years’ time.
