For years, strategists raised red flags about the dominance of tech stocks in the market. The concern is back again, with the value of tech stocks at the S&P 500 nearing their highest level in more than a decade.
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 aim for broad participation to ensure a rally can be sustained. This time, that s not the case. And the well-worn concern over narrow leadership has clashed with a newer wrinkle for the markets, the obsession with all things AI.
Lakos-Bujas has pointed the finger at artificial intelligence, particularly the ChatGPT-induced craze for large language models and generative AI, as the reason for the latest leg up in mega-cap tech. He claims that 53% of the S&P 500 gain was due to just six major language model innovators: Salesforce, Amazon, Meta, Nvidia and Microsoft.
Apple's loss is not even accounting for it, he said. JPMorgan notes that the two biggest firms in the S&P 500, Microsoft, and Microsoft, account for an average of $4.7 trillion in market capitalization, or about 13% of the index's highest value.
It hasn't been AI enthusiasm alone that has propelled tech. The Fed's belief that it will cut rates before the end of the year has also been a tailwind.
Lakos-Bujas sees trouble ahead for tech no matter where rates go, while lower rates from this point on could signal trouble ahead, while higher rates are likely to pose a headwind for rich multiples and renew capital pressures. The valuation of current valuations are already giving some investors pause, including Emily Bowersock Hill, founder partner of Bowersock Capital Partners. 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. If what s propelled tech stocks higher this year be it optimism over lower rates or AI enthusiasm are eroded, that could potentially mean a rocky road for the market s overall rally.
Wells Fargo's equity strategy head Chris Harvey joins Yahoo Finance Live at 10 a.m. ET. He appeared to be a 10% correction for stocks in the next three to six months.