The spectacular rise within the tech giants’ shares far exceeds their earnings and will mean that the S&P 500 is becoming more vulnerable, says Torsten Sløk, chief economist at Apollo Global Management.
In a Note on SundayHe identified that the ten largest firms within the S&P 500 account for 35 percent of the index’s market value but only 23 percent of its revenue.
“This divergence has never been this large, suggesting that the market is at record levels of optimism about the future earnings of the top 10 companies in the index,” Sløk wrote. “In other words, the problem facing the S&P 500 today is not only the high concentration, but also the record levels of optimism about the future earnings of a small group of companies.”
Apollo Global Management
Because the S&P 500 is weighted by market capitalization, the soaring share prices of the massive technology firms embracing the AI boom have caused recent gains to be concentrated in only a handful of stocks, masking the relative mediocrity of the remainder of the index.
Before Nvidia began its sell-off earlier this month, the AI chip leader accounted for greater than a 3rd of this 12 months’s S&P 500 rally.
“Such a high concentration means that everything is good if Nvidia continues to grow,” said Sløk warned on 12 June“But if it starts to decline, it will hit the S&P 500 hard.”
As market leadership becomes increasingly concentrated, this also applies to investors’ portfolios, especially as investing in index funds becomes increasingly popular.
Bank of America analysts said in a recent note that the common large-cap fund invests 33 percent of its portfolio in its five largest holdings, up from just 26 percent in December 2022.
Similarly, the proportion of funds with greater than 40% of their portfolio invested of their five largest holdings has increased from lower than 5% in December 2022 to 25%.
Meanwhile, Wall Street analysts are bullish on the S&P 500 and are moving to boost their year-end targets. Even certainly one of the most important bears has capitulated and is now one of the crucial bullish analysts.
And Tom Lee, co-founder of Fundstrat Global Advisors, recently said the S&P 500 could hit 15,000 by the tip of the last decade. He’s not the one Wall Street bull making daring predictions.
Ed Yardeni has already pointed to a different supercycle of the “Roaring Twenties” and said that the S&P 500 will rise to six,000 points next 12 months. By the tip of the last decade, the stock index will could reach 8,000.
