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Cola bubble warnings at Wall and Broad.
The market’s relentless rally has sent the S&P 500 up nearly 25% from its October lows, driven by gains in just a handful of stocks.
Leading the way is AI favorite Nvidia (NVDA). The chipmaker has gained more than 80% since the beginning of the year, helping to propel the S&P 500 (^GSPC) and the Nasdaq (^IXIC) to record highs.
The concentrated outperformance has led some on Wall Street to warn that the rally has gone too far and declare stocks are in bubble territory.
Market concentration has reached its highest level in several decades. The 10 largest US stocks now account for 33% of the S&P 500’s market capitalization and 25% of the S&P 500’s earnings, according to data from Goldman Sachs.
But concerns about narrow market share and coldness may be misguided. Several top Wall Street strategists made clear in Yahoo Finance’s “Morning Brief” last week that there is reason to believe the market will continue to rise.
“This might be the best sales gimmick out there right now… I don’t think it’s justified,” Citi US chief equity strategist Drew Petit said of the bubble scare on Yahoo Finance Live. “It’s actually a lot healthier than people think.”
Strong quarterly results from big tech companies have reinforced the bullish stance. Nvidia posted another spectacular quarter thanks to growing demand for AI, while Meta (META), Microsoft (MSFT), and Amazon (AMZN) all beat expectations.
Higher profit margins and proven profitability are two reasons why Wedbush analyst Dan Ives describes the current market environment as a “1995 moment” rather than comparing it to the start of the dot-com bubble.
“In our view, this is nowhere near the 1999/2000 period, as sky-high valuations, lack of monetization/infrastructure, weak balance sheets, booming business models and macroeconomic context were in a totally different world.” back then compared to what we see today,” Ives wrote in a note to clients.
Chris Danely, Citi’s head of U.S. semiconductor research, echoed Ives’ optimistic view on the technology, telling Yahoo Finance that he “sees no end in sight.”
“We have a long way to go until we start ringing alarm bells or even hearing bells jingling,” Danely told Yahoo Finance Live.
Beyond the technology and beneath the surface, the underlying trends are positive. Market breadth, an indication of bullish sentiment, has slowly begun to improve. The S&P 500 Equal Weighted Index (SPXEW) and Small Caps outperformed the S&P 500 over the past month.
“The broadening we’re seeing is happening by stealth,” Charles Schwab’s Liz Ann Sonders told Yahoo Finance, adding that the turmoil beneath the surface is “not a bad thing.”
And it’s important to note that history says that high concentration is not necessarily indicative of a market top. Goldman Sachs analyzed market concentrations spanning the last 100 years and found that the S&P 500 recovered more often than not after past concentration peaks.
“A consistent pattern in periods of high concentration is large swings in momentum,” Goldman Sachs equity analyst Ben Snider wrote in a note to clients. “While the performance of high Momentum leaders was inconsistent, previous laggards appreciated in absolute terms in each episode. This supports our view that a ‘catch-up’ by laggards is more likely to disrupt the current Momentum rally than a “recovery. by recent market leaders.”
Sean Smith is an anchor on Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Advice on deals, mergers, activist situations or anything else? Send an email to seanasmith@yahooinc.com.
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