The world's biggest technology stocks led the early strength of the S&P 500. The question for the rest of the year is whether that strength will continue.
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Released on July 9, 2024 • 4 min read
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(Bloomberg) — The world’s biggest technology stocks led the S&P 500 index through the first half of the year. The question for the rest of the year is whether their strength will continue.
Wall Street is historically biased toward the technology sector, raising the risk if the AI-driven stock rally stalls, with valuations skyrocketing and earnings growth expected to slow going forward.
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That adds uncertainty to investors betting that big tech companies will continue to rise, warning of “sluggish momentum, narrowness and complacency” in the market, according to Lisa Charette, chief investment officer for Morgan Stanley's asset management division.
The S&P 500 index is up 17% this year, but two-thirds of that gain has come from just six companies: Nvidia, Microsoft, Alphabet, Amazon.com Inc., Meta Platforms Inc. and Apple Inc. Nvidia, the AI-focused chipmaker that has soared 159% this year, accounts for about 30% of the S&P's gains in 2024, its biggest contribution from a market leader in at least the past decade.
An equally-weighted version of the S&P 500 is up just 3.9% this year, with large-cap stocks beating small-cap stocks by a historic margin.
The dominance of the tech sector, particularly the concentration of benefits among a few key companies seen as at the forefront of the AI revolution, suggests similarities to the dot-com era, when the internet craze took years to recover before bursting. But today's megacaps are widely seen as stronger, with massive cash flows, strong competitive positions and robust long-term demand trends.
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Given the uncertainty about the economic outlook, many investors are favoring large-cap stocks with high-quality characteristics such as profitability and growth, said Matt Stuckey, chief portfolio manager of equities at Northwestern Mutual Wealth Management Co.
“But,” he added, “AI is getting more expensive, and this is one of the most momentum-driven markets I've seen in the last 25 years. If the enthusiasm around AI were to reverse, it would certainly make us look vulnerable.”
The market's rally this year reflects both the strength of the big-cap rally and its influence over major stock indexes. The Magnificent Seven, which includes Tesla, which is up 1.8% this year, now account for a record 33.4% of the S&P 500's market capitalization, according to data compiled by Bloomberg.
There are signs that Wall Street is becoming more cautious. Bank of America said strategists did not increase their allocations to equities in June, “signaling uncertainty about the duration of the bull market.” Meanwhile, analysis by Goldman Sachs showed that hedge funds have been “aggressively” selling tech stocks. Truist Advisory Services recently downgraded the tech sector to neutral, citing valuations.
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Citigroup strategists said they expect “significantly increased volatility” ahead and urged investors to lock in profits in some high-flying AI-related stocks, particularly semiconductor makers.
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, said the earnings cycle could cause technology and related sectors to lose their market leadership position, with energy, health care and financials taking over.
The Magnificent Seven are expected to grow earnings 29.9% this year, slowing to 17.8% in 2025, according to Bloomberg Intelligence. Excluding these stocks, the S&P 500 is expected to grow 6.4% this year and double to 13.3% in 2025.
Still, the double-digit growth pace speaks to positive fundamentals that many expect will continue to support the sector going forward.
“Tech valuations are expensive, but not enough to sound the alarm,” said Jason Alonzo, a portfolio manager at Harbor Capital Advisors. “Clearly the market's view on AI is being judged with a grain of salt,” he added. “But I don't see much to suggest that excitement is over or that we're at our limit.”
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Today's Tech Charts
Top Technology News
- Samsung Electronics is set to unveil new health-tracking features not yet available on Apple Inc's Watch, in its latest effort to gain an edge over the U.S. electronics giant.
- Tech companies from Microsoft to Qualcomm are launching marketing campaigns for new computers they're calling “AI PCs,” touting artificial intelligence capabilities built into laptops and desktops.
- An investor group backed by Clayton Dubilier & Rice and Permira has made a non-binding offer to take French cybersecurity company Exclusive Networks SA private for about 2.2 billion euros ($2.4 billion).
- Taiwan's exports grew at the fastest pace since February 2022, with shipments of high-tech products surging more than fourfold.
- Hong Kong has outlined long-expected but vague plans to regulate ride-hailing services, creating uncertainty for Uber Technologies Inc.'s operations in a city notorious for the poor quality of local taxi service.
Earnings due on Tuesday
—With assistance from Sagarika Jaisinghani.
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