Reuters: "Nvidia's rise increasingly influences growth on Wall Street"

The rally that has propelled U.S. stocks to new all-time highs, increasingly reliant on the performance of chip maker Nvidia and a handful of tech giants, is rekindling concerns that the U.S. market's performance depends only on a handful of companies, writes Reuters.

About 60% of the S&P 500's total return of more than 12% this year has been given by the performance of five companies whose shares are among the largest weights in the index: Nvidia, Microsoft, Meta Platforms (formerly Facebook), Alphabet (the company parent of Google) and Amazon, according to S&P Dow Jones Indices data.

Nvidia - which on Wednesday became the second most valuable company in the world after a 147% increase in its share price this year - provided about a third of the entire increase in the index, Reuters also notes. As companies' stock prices have risen, their weightings in the S&P 500 have increased, so they have a growing influence on the index. At the end of May, Microsoft, Apple, Nvidia and Alphabet accounted for nearly 24 percent of the S&P 500, the largest combined weighting of four stocks in 60 years, according to Bianco Research data.

In the view of many investors, the rise in the company's prices is deserved, given its robust profits, dominant competitive positions and expectations of capitalizing on the benefits offered by artificial intelligence. But some are concerned that the market's concentrated earnings structure poses risks to the index's performance, Reuters also writes.

"If these names stop performing ... and we don't see the rest of the market providing that support, well that can be a source of vulnerability," said Angelo Kourkafas, senior investment strategist at Edward Jones.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, pointed out that the weight of the top ten stocks in the S&P 500 had risen to 34.1% at the end of May, the largest ever recorded at the end of a month. Moreover, concerns regarding the concentration of market growth have repeatedly arisen in recent years. The S&P 500's rise in 2023 - when worries about a possible recession drew investors to large companies, less exposed to economic fluctuations - was propelled by the spectacular rise of a group of tech giants dubbed the "Magnificent Seven."

Thus, while the share prices of these companies rose, other large areas of the market did not have the same evolution, even if the recession did not occur.

Signs that more sectors are participating in the overall market's rise emerged in the first quarter of this year, when financials, energy and industrials outperformed the S&P 500. But in the second quarter, the performance of these groups depreciated , even though the index has increased.

The equal-weight S&P 500, which better reflects the performance of mid-cap stocks in the index, was up just 4.5% for the year at midweek, compared with a 12% gain for the standard S&P 500.

"We were all excited about this expansion," said Jack Manley, strategist at JP Morgan Asset Management. "But it seems to have stopped, at least in the first half of the year."

Among the reasons why the market appreciation is being led by just a few stocks, analysts say, are the profits reported by the tech giants for the first quarter of the year and enthusiasm for companies that benefit from artificial intelligence. Concerns about a change in the dynamics of the economy - reflected for example recently by the weaker report on manufacturing in the United States - may be another factor.

Amid its position as the dominant maker of chips used in artificial intelligence applications, Nvidia's market value topped $3 trillion on Wednesday, making it the second-largest company by market capitalization after Microsoft. Since the company reported its results on May 22 and through the middle of this week, the stock price had risen 29%, while the S&P 500's appreciation was only 0.9%.

"Nvidia supported the move," said Michael O'Rourke, chief market strategist at JonesTrading. "It's a risk because, if there is a correction in this name ... it will be felt in the market".

On the other hand, according to other investors, the concentration simply reflects the economic robustness of the companies and is not in itself a cause for alarm. "The big names are outperforming because their results and outlook are strong," said Peter Tuz, president of Chase Investment Counsel, adding that, however, it is preferable for a larger group of stocks to participate in the market's appreciation because that reflects economic strength. wider.

According to some views, the profits of companies in the S&P 500 excluding the big names in technology will improve, so more companies will again participate in the market's growth. "The difference in earnings performance will start to narrow," said Kourkafas of Edward Jones Investments, quoted by Reuters.