Tech Titans Propel S&P 500’s First Half

Tech giants have driven an impressive performance for the S&P 500 in the first half of the year. The question now looms: Can this momentum continue?

The tech sector’s dominance on Wall Street has reached unprecedented levels, amplifying concerns over a potential slowdown in the AI-driven rally and stretched valuations.

Lisa Shalett, chief investment officer at Morgan Stanley’s wealth management unit, warns of risks in a market exhibiting “stretched momentum, weak breadth, and complacency.”

The S&P 500 has surged 17% year-to-date, including a 0.2% increase on Tuesday. Notably, nearly two-thirds of this gain is attributable to just six companies: Nvidia Corp., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Apple Inc.

Nvidia, with a staggering 165% increase in its stock price this year, contributes nearly 30% to the S&P’s overall rise, marking the highest contribution by a market leader in over a decade.

In contrast, an equal-weighted version of the S&P 500 shows a more modest 3.9% increase for the year, highlighting the disproportionate impact of large-cap tech stocks on overall market performance.

The tech sector’s overwhelming influence and concentrated gains draw comparisons to the dot-com era’s exuberance, tempered by today’s megacaps’ resilience with strong cash flows, competitive positions, and robust long-term demand.

Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management Company, notes investor preference for megacaps amidst economic uncertainties, emphasizing strong fundamentals while cautioning against high valuations in a momentum-driven market.

The ascent of the market this year underscores both the strength of the megacap rally and their significant influence on major indexes. The “Magnificent Seven,” including Tesla Inc., now constitute a third of the S&P 500’s total market capitalization, a record level.
Despite caution among analysts and investors, reflected in stagnant equity allocations and aggressive tech stock selling by hedge funds, optimism persists amid concerns over valuation.

Analysts foresee potential volatility ahead and recommend profit-taking in high-flying AI stocks, particularly chip-makers, as they anticipate shifts in market dynamics.

Gina Martin Adams, chief equity strategist for Bloomberg Intelligence, suggests that changes in the earnings cycle may prompt sectors like energy, healthcare, and financials to assume leadership from tech and its affiliates.

While the Magnificent Seven are expected to show robust earnings growth of 29.9% this year, projections suggest a slowdown to 17.8% in 2025. In contrast, the broader S&P 500, excluding these stocks, is expected to accelerate growth to 13.3% by 2025.

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