The stock market has its eggs in one basket — AI: Morning Brief
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For years, strategists raised red flags over the dominance of tech stocks in the market. That concern is back again, with the weighting of tech stocks in the S&P 500 near their highest ever.
The tech earnings bonanza this week – with Microsoft and Alphabet out yesterday, and Amazon to come Thursday – has thrown that into relief once again.
The thinking goes that a rally led by just a few stocks leaves the overall market more vulnerable to shocks: “The current degree of crowding implies the risk of recession is far from priced in,” write JPMorgan strategists led by Dubravko Lakos-Bujas in a note to investors.
Wall Street analysts like to see broad participation to ensure a rally can be sustained. That’s not the case this time. And the well-worn concern over narrow leadership has collided with a newer wrinkle for the markets: the obsession with all things AI.
Indeed, Lakos-Bujas points the finger at artificial intelligence, and in particular the ChatGPT-induced craze for large language models and generative AI, as the culprit for the latest leg up in mega-cap tech. He posits that 53% of the S&P 500’s gain this year is due to just six large language model innovators: Microsoft, Alphabet, Amazon, Meta, Nvidia and Salesforce.
That’s not even accounting for Apple. Along with Microsoft, the two largest companies in the S&P 500 amount to $4.7 trillion in market capitalization, or around 13% of the index – the highest ever, according to JPMorgan.
It hasn’t been AI enthusiasm alone that has propelled tech. The belief that the Federal Reserve will cut rates before the end of the year has also been a tailwind.
But Lakos-Bujas sees trouble ahead for tech no matter where rates go: “Lower rates from this point on could signal trouble ahead while higher rates are likely to pose a headwind for rich multiples and renew cost of capital pressures.”
Current valuations are already giving some investors pause, including Emily Bowersock Hill, founding partner at Bowersock Capital Partners. “I do think the run-up in tech stocks is overdone, and U.S. large-cap stocks are richly priced at the moment,” she told Yahoo Finance Live. “I’m not in the camp that thinks this is a great buying opportunity, especially when you look at the valuation of the market versus where it was right at the beginning of 2022.”
Whatever the case, if what’s propelled tech stocks higher this year – be it optimism over lower rates or AI enthusiasm – is eroded, that could potentially mean a rocky road for the market’s overall rally.
Programming note: Wells Fargo Head of Equity Strategy Chris Harvey joins Yahoo Finance Live at 10am ET. He seems a 10% correction for stocks in the next three to six months.
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