© Reuters. FILE PHOTO: Traders work at the New York Stock Exchange (NYSE) in New York City, US, May 22, 2023. REUTERS/Brendan McDiarmid
By Louis Krauskopf
NEW YORK (Reuters) – As the U.S. stock market continues to rally, investors who hold shares in the tech and growth giants that are in charge are debating whether to cash out or keep riding.
Data from BofA Global Research showed that $8.5 billion poured into tech stocks in the latest week, as investors rushed to rally that saw big tech gains of 33% in 2023. The index has risen 11.5% this year and stands higher. level in 10 months.
Yet others see reasons for caution. Among them is the tightness of the market’s bullishness: The five largest stocks in the S&P 500 have a combined weighting of 24.7% in the index, a record high dating back to 1972, Ned Davis Research said in a recent report. Heavyweights could mean bigger ramifications for the broader markets if these names falter.
“We’ve had this big run and the main question is, do you think it’s going to last or do you think things are going to go back to the middle?” said Peter Tose, chairman of the investment board at Chase.
Excitement about advances in artificial intelligence is a key factor fueling gains in the outsized stocks. Major shareholders include Nvidia (NASDAQ:) shares, which are up about 170% this year, while Apple (NASDAQ::) and Microsoft (NASDAQ::), the two largest US companies by market capitalization, are up nearly 40%.
Jay Hatfield, CEO of hedge fund InfraCap, believes excitement about artificial intelligence will continue to fuel mega-cap stocks. It’s overweight, including Nvidia, Microsoft, and Google-parent Alphabet (NASDAQ:).
“We believe 100% in the AI boom,” said Hatfield. “I would be shocked if these stocks weren’t much higher by the end of the year.”
Data on Friday showed job growth in the United States accelerated in May, even as a rise in the unemployment rate indicated labor market conditions were softening, boosting investor appetite for stocks on hopes that the Federal Reserve will be able to bring down inflation without hurting growth too hard. The S&P 500 rose 1.45%.
Megacap shares led the markets for much of the decade after the financial crisis and betting on them was a risky strategy in 2023. Data from Bank of America showed investors’ allocation to cash is higher than it has been in the past, which some market watchers believe leaves many. of fuel to push the march even further.
The strong momentum could also continue to push stocks higher.
Michael Purvis, CEO of Tallbacken Capital Advisors, wrote earlier this week that technical analysis showed the Nasdaq 100 to be overbought, a condition that could make an asset more vulnerable to sharp declines. However, the index managed to rise another 10% over three months when it reached the same state two years ago, according to Purves.
Nvidia’s recent rally showed how the stock can continue to climb even after posting huge gains. Shares were already up 109% heading into its May 24 earnings report, but they’re up another 30% in the past week after the chipmaker’s surprisingly upbeat sales forecast.
Nvidia shares, which now trade at 44 times forward earnings estimates, according to Refinitiv Datastream, are getting “a bit rich,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management.
said Mahn, who said Microsoft shares remain attractive due in part to the company’s impressive cash flow and healthy dividend yield.
Others are growing anxious, citing factors such as rising valuations and signs that the rest of the market is weakening while a small group of stocks is rallying.
The performance of just seven stocks, Apple, Microsoft, Alphabet, Amazon (NASDAQ:), Nvdia, Meta Platforms, and Tesla (NASDAQ:), represents the total return of the S&P 500 for 2023 through May, according to the S&P Dow Jones Indices.
At the same time, only 20.3% of S&P 500 stocks have outperformed the index on a three-month basis, a record low going back five decades, according to Ned Davis. And the company’s research showed that levels below 30% preceded a weaker performance for the broader market, with the S&P 500 up 4.4% over the next year versus an average of 8.2% for all one-year periods.
David Kotok, chief investment officer at Cumberland Advisors, has in recent days reduced holdings of the iShares semiconductor ETF after the recent rally in Nvidia shares.
Kotok views the narrowing of the range as an ominous sign for the broader stock market, saying stocks also look less favorable on some asset valuation metrics.
In one commonly used valuation metric, the S&P 500 is trading at 18.5 times forward earnings estimates compared to its historical average of 15.6 times, according to Refinitiv Datastream.
“You can have focus (in the market) and it can last for a while,” he said. But he said, “For me, the narrowing is a warning.”