Investors were treated to a significant upside market performance in U.S. stocks during the first half of 2024, with the S&P 500 index (SPX) registering a 14% increase. This return is slightly below the gains seen in the first half of 2023 but still ranks among the strongest first halves since the late-1990s dot com era.
However, some market participants are concerned about the large contribution of five mega-cap companies: Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), and Apple (NASDAQ:AAPL). Together they accounted for almost 60% of the S&P 500’s advance. Nvidia, in particular, has benefitted from a huge updraft from investor enthusiasm about the potential of generative artificial intelligence, adding a substantial amount to the market’s gains.
Market Concentration and Risks
Despite the overall market gains, there have been stock market risks as the rally has been uneven. To put this into perspective, an equal-weight (not a market-cap weight) version of the S&P 500 treating all companies equally regardless of size, has trailed the market-cap-weighted index by 10% since January. This is the widest underperformance in the first six months of a year in the market’s history. Nvidia alone accounted for 31% of the market’s first-half advance.
Information and Communication leading the way
The information technology and communication services sectors have led the gains, with tech stocks now having a 32% weight in the S&P 500, nearing the 35% record weight set during the dotcom era. Information technology stocks have advanced 28% in 2024, while communication services shares are up 26%
Key Contributors to the Rally
Nvidia has been the standout performer, contributing the most to the S&P 500’s rally with a roughly 150% increase on a total return basis. The company’s market capitalization recently reached $3 trillion, driven by its focal position in AI technology and strong earnings.
Microsoft has also been a significant driver, benefiting from its cloud computing services and AI advancements. The company has seen substantial gains, contributing to the overall market’s performance.
Amazon is another company that is performing well, leveraging its e-commerce dominance and expanding cloud services. Investor optimism around its AI initiatives and robust earnings has buoyed its stock.
Meta has seen a resurgence, driven by its investments in AI and the metaverse. The company’s stock has rallied significantly, contributing to the S&P 500’s gains.
Lastly, Apple has maintained its position as a market leader with strong product sales and innovations in AI. Despite concerns about overvaluation, the company’s stock has continued to rise, driven by investor confidence in its long-term growth prospects.
Broader Market Implications
While the AI boom has driven significant gains, it has also raised concerns about the market’s scope. The equal-weighted S&P 500 is only up about 4% year-to-date and is down in the second quarter, indicating weaker performance among many of the index’s other constituents. This narrow rally has led to growing signs of “weakness that has been boiled beneath the surface of the market,” according to Kevin Gordon, senior investment strategist at Charles Schwab (NASDAQ:SCHW).
Future Outlook
Despite the concentration of gains, some investors are hopeful that underperforming sectors will eventually start to catch up, without technology stocks going into reverse. This sentiment is echoed by Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management (NYSE:MS), who believes that sectors like the industrials and financials, where business is very good, have been left behind but may see a resurgence.
Meanwhile, JPMorgan’s Asset Management forecasts a continued U.S. stock market rise in the second half of 2024, driven by solid earnings coupled with the end of the Federal Reserve’s monetary-tightening campaign. They recommend investing in large-cap shares and a mix of value and growth stocks, citing positive equity performance opportunities despite risks from AI adoption timelines and slowing economic growth.
Key Takeaway
the first half of 2024 has been marked by a significant rally in the U.S. stock market, driven primarily by five mega-cap companies in the AI sector. While this has led to impressive gains, it has also highlighted concerns about market concentration and the performance of other sectors. Investors are cautiously optimistic about the second half of the year, with expectations of continued strength in the stock market driven by solid earnings and economic growth.
