Free Trial

Is Tech Stocks' Dominance A Warning Signal For The Broad Market?

Teach stocks price forecast

Key Points

  • Six stocks, Apple, Microsoft, Nvidia, Meta Platforms, Alphabet, and Amazon, have been largely responsible for the S&P 500's 8.31% gain this year.
  • Apple and Microsoft alone account for 14.15% of the entire S&P 500, and when combined with the other four stocks, the total is nearly 24% of the index's weighting.
  • This concentration of stocks from a single sector may be problematic for the broad market because it changes the role of an index fund as a way to diversify.
  • JP Morgan's global markets strategies team notes that this is the narrowest stock leadership in an up market since the 1990s.
  • 5 stocks we like better than NVIDIA.

 

Investors sitting on the sidelines, waiting for the next shoe to drop, have missed out on the year-to-date gains of a small number of S&P 500 stocks largely responsible for this year’s 8.31% gain in the large-cap index. Those stocks, and their returns, are:

Apple and Microsoft alone account for 14.15% of the entire S&P 500. When you include the other four stocks named above, your total is nearly 24% of index weighting.

That’s a problem for the broad market. The purpose of an index is to track a broad, diversified basket of stocks, which, in theory, offers a wide lens on overall market and business cycle activity.

Are Investors Diversified Now?

For investors who hold ETFs such as the SPDR S&P 500 ETF Trust NYSEARCA: SPY, the selling point has always been broad sector and industry diversification. The thinking goes, if techs have a rough year, maybe consumer staples or industrials will pick up the slack.

But when a small number of companies, all from the same sector, are so dominant, that changes the role of an index or index fund. 

In addition to all of the above stocks hailing from the tech sector, there’s another factor driving much of the growth: AI. With several stocks in the list, it’s pretty clear to see the connection, and it’s been covered extensively by MarketBeat.

Apple hasn’t formally announced AI initiatives, as some of the others have, In the company’s most recent earnings conference call, CEO Tim Cook responded to an analysts’s question about AI plans, saying, “I do think it’s very important to be deliberate and thoughtful in how you approach these things. And there’s a number of issues that need to be sorted, as is being talked about in a number of different places, but the potential is certainly very interesting.”

Apple is recruiting for team members with expertise in AI and machine learning in its various groups. 

With Amazon, most investors immediately think of the e-commerce applications, and those blue vans pulling up to the driveway. But one big line of business is Amazon Web Services (AWS), which accounts for about 14%, or $21.4 billion in revenue for the company.

Machine Learning In The Spotlight

Amazon touts AWS’ machine-learning services to prospective customers. In addition, its warehouses and other operations are increasingly driven by AI. It’s also boosting its podcast features with a new AI acquisition, a privately held company called Snackable AI. 

In an April 25 research note, J.P. Morgan’s global markets strategies team pointed out the lack of market breadth in the S&P 500 this year, calling it the “ narrowest stock leadership in an up market since the 1990s.”

The J.P. Morgan analysts specifically cited market-cap creation of $1.4 trillion among a small number of stocks, due to interest in generative AI and large-language models.

The analysts termed this phenomenon “mega-cap crowding,” and added that the current level of mega-cap crowding implies that the risk of recession is not priced into markets. 

They also cited a strong upside in Salesforce Inc. NYSE: CRM, which is not among the top 10 most heavily weighted S&P 500 stocks, but also benefited from interest in its AI endeavors. Salesforce boasts a year-to-date return of 49.02%, putting it among the index’s top gainers. 

Concentration Risk

While concentration risk is very much a real concern in portfolio allocation, there’s also the reality that about three-fourths of stocks tend to follow the market’s direction. While techs got hit especially hard in 2022, energy and utilities were the only sectors with a gain, and utilities eked out a gain of 1.69%, doing their job as defensives, and helped by dividends.

It’s never a bad idea to diversify and spread the risk. Investors with an outsized concentration in large tech stocks that have been going gangbusters this year should monitor their holdings closely. If they show signs of selling off, such as falling below their 50-day averages, it may be time to pare back and take some profits. 

→ War on Elon Escalates… (From Porter & Company) (Ad)

Should you invest $1,000 in NVIDIA right now?

Before you consider NVIDIA, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and NVIDIA wasn't on the list.

While NVIDIA currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

Metaverse Stocks And Why You Can't Ignore Them Cover

Thinking about investing in Meta, Roblox, or Unity? Click the link to learn what streetwise investors need to know about the metaverse and public markets before making an investment.

Get This Free Report
Kate Stalter
About The Author

Kate Stalter

Contributing Author

Retirement, Asset Allocation, and Tax Strategies

Like this article? Share it with a colleague.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Apple (AAPL)
4.5463 of 5 stars
$226.80+0.5%0.44%35.27Moderate Buy$238.76
Microsoft (MSFT)
4.9474 of 5 stars
$416.06-0.1%0.80%36.02Moderate Buy$493.94
NVIDIA (NVDA)
4.885 of 5 stars
$124.92+1.7%0.03%73.05Moderate Buy$142.10
Meta Platforms (META)
3.9814 of 5 stars
$595.94+2.3%0.34%34.23Moderate Buy$598.08
Amazon.com (AMZN)
4.9183 of 5 stars
$186.51+2.5%0.11%52.24Buy$223.65
Alphabet (GOOGL)
4.1872 of 5 stars
$167.06+0.7%0.48%25.62Moderate Buy$201.14
Salesforce (CRM)
4.6233 of 5 stars
$287.75+2.4%0.56%51.75Moderate Buy$310.74
SPDR S&P 500 ETF Trust (SPY)N/A$572.98+0.9%1.22%N/AN/AN/A
Compare These Stocks  Add These Stocks to My Watchlist 


Featured Articles and Offers

Recent Videos

Broadcom’s Momentum Returns: Will It Reach New Highs?
Toyota’s Big Bet on Joby: Will Air Taxis Revolutionize Travel by 2025?
UnitedHealth Group: A Healthcare Giant with Strong Dividends

Stock Lists

All Stock Lists

Investing Tools

Calendars and Tools

Search Headlines