Investors in the central IT and growth companies propelling the US stock market’s rise are contemplating whether to sell or stay.
According to BofA Global Research, investors poured a record $8.5 billion into tech stocks in the past week, as the tech-heavy Nasdaq 100 rose 33% in 2023. The S&P 500 is at a 10-month high after rising 11.5% this year.
Others advise caution. Ned Davis Research reported that the five largest S&P 500 equities have a total weight of 24.7 percent, a record high since 1972. If those names fail, markets could suffer more.
“We had this big run and the essential question is, do you believe it’s going to continue or do you believe things will return to the mean?” Chase Investment Counsel president Peter Tuz.
Megacap stocks are boosted by AI excitement. Nvidia shares are risen 170 percent this year, while Apple and Microsoft, the top two US firms by market capitalization, are up almost 40%.
Jay Hatfield, CEO of hedge fund InfraCap, believes AI excitement will keep mega-cap stocks rising. Nvidia, Microsoft, and Alphabet are overweight. “We 100% believe in the AI boom,” Hatfield added. “I’d be surprised if these stocks aren’t significantly higher by year’s end.”
In May, US job growth accelerated even as the unemployment rate rose, raising confidence that the Federal Reserve can lower inflation without damaging the economy. S&P 500 climbed 1.45%.
After the financial crisis, mega-cap stocks dominated markets, making betting against them risky in 2023. According to BofA statistics, investors’ cash allocation is more significant than usual, which might drive the rise, market observers say.
This week, Tallbacken Capital Advisors CEO Michael Purves said that technical research suggested the Nasdaq 100 is overbought, making it more susceptible to significant falls. Purves said the index rallied another 10% over three months two years ago.
Nvidia illustrated how a stock might keep rising after significant gains. After the chipmaker’s strong sales forecast on May 24, shares jumped another 30%.
Hennion & Walsh Asset Management chief investment officer Kevin Mahn called Nvidia shares “a little rich” at 44 times forward earnings projections, according to Refinitiv Datastream.
Mahn says Microsoft shares are attractive due to the company’s strong cash flow and dividend yield.
Others are apprehensive due to rising valuations and indicators that the market is stagnating while a small cluster of stocks surges.
According to S&P Dow Jones Indices, seven stocks—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla—accounted for the S&P 500’s 2023 total return through May.
According to Ned Davis, only 20.3 percent of S&P 500 equities have outperformed the index on a rolling three-month basis, a record low extending back five decades. The firm found that levels below 30% have preceded lower market performance, with the S&P 500 growing 4.4 percent over the next year compared to an average of 8.2 percent for all one-year periods.
Following Nvidia’s recent stock surge, Cumberland Advisors’ chief investment officer David Kotok cut his iShares semiconductor ETF holdings.
Narrowing width is an awful indicator for the stock market, according to Kotok, who also sees equity value indices deteriorating.
According to Refinitiv Datastream, the S&P 500 is trading at 18.5 times forward earnings expectations, up from 15.6 times historically.