A rally pushing U.S. equities to record highs increasingly depends on chipmaker Nvidia (NVDA.O) and a few other large stocks, raising concerns about the market’s reliance on a small group of companies.
Around 60% of the S&P 500′s (.SPX) total return of over 12% this year has been driven by five heavily weighted companies: Nvidia, Microsoft (MSFT.O), Meta Platforms (META.O), Alphabet (GOOGL.O), and Amazon.com (AMZN.O), according to S&P Dow Jones Indices.
Nvidia, which recently became the world’s second-most valuable company after a 147% surge this year, has contributed roughly one-third of the index’s gain.
As their share prices have risen, these companies’ weightings in the S&P 500 have increased, giving them more influence over the index.
By the end of May, Microsoft, Apple (AAPL.O), Nvidia, and Alphabet made up nearly 24% of the S&P 500, the largest combined weight for four stocks in six decades, according to Bianco Research.
Many investors believe these companies deserve their market dominance due to their strong earnings, competitive positions, and potential in artificial intelligence.
However, some worry that if these key players falter, it could impact the broader market.
“If these names stop performing well … and we don’t see the rest of the market providing that support, that could potentially be a source of vulnerability,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
At the end of May, the ten largest stocks in the S&P 500 accounted for 34.1%, the highest-ever month-end weight for the top ten, noted Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The S&P 500’s 24% gain in 2023 was driven by large tech and growth stocks, while much of the market remained tepid despite no recession.
Early 2024 saw broader performance with financials, energy, and industrials sectors outperforming the S&P 500, though they declined in the second quarter as the index climbed.
The equal-weight S&P 500 (.SPXEW), representing the average stock in the index, is up just 4.5% this year compared to the S&P 500’s 12% gain.
“We were all excited about the broadening out of the recovery,” said Jack Manley, global market strategist at J.P. Morgan Asset Management.
“It appears to have stalled out, at least in the first half or so of the year.”
Analysts attribute the market’s narrowing to the dominance of megacap tech earnings and AI enthusiasm.
Concerns about an economic slowdown, reflected in weaker U.S. manufacturing data, may also play a role.
Nvidia’s rise continues, supported by its leading position in AI chips. Its market value recently exceeded $3 trillion, surpassing Apple and trailing only Microsoft.
Since its May 22 earnings report, Nvidia’s stock has gained 29%, while the S&P 500 is up 0.9%.
“Nvidia itself was supporting the tape,” said Michael O’Rourke, chief market strategist at JonesTrading. “That’s a risk because if a correction emerges in that name … you’re going to feel it in the market.”
Some investors believe the concentration reflects the companies’ economic strength.
“The megacaps ‘are outperforming because the results and outlook are strong,’ said Peter Tuz, president of Chase Investment Counsel.”
Others are hopeful for a market broadening, supported by improving earnings across the S&P 500.
Magnificent Seven earnings are expected to rise about 27% in 2024, compared to a 7.4% increase for the S&P 500 excluding those seven, with the gap narrowing throughout the year, according to Tajinder Dhillon, senior research analyst at LSEG.
“That earnings outperformance gap will start to narrow,” Edward Jones’ Kourkafas said. “Investors shouldn’t give up on that theme of broadening leadership this year.”