Despite Bubble Fears, Big-tech Weakness Leads to Broad Gains for the S&P 500

The scorching ascent of U.S. stocks at the beginning of 2024 has raised concerns about parallels with historical boom-and-bust cycles on Wall Street, sparking debates on whether the market is veering into overheated territory.

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The S&P 500 Index has notched record highs 16 times this year, constituting around one-third of all trading days. Nvidia Corp., a prominent player in artificial intelligence (AI), has surged by nearly 80%, contributing to an increase of approximately $1 trillion in market value, despite a Friday dip alongside other tech shares. Additionally, speculative areas like Bitcoin have experienced significant gains.

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While these developments might suggest an unsustainable pace, signs indicate that the market's strength, largely rooted in the economy's resilience and robust corporate earnings, has not transformed into a speculative frenzy.

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Contrary to fears of excessive exuberance, the so-called "Magnificent Seven" stocks have exhibited variations, suggesting that investors are not indiscriminately pouring money into the market. The muted response to recent initial public offerings (IPOs) also supports the notion that speculative fervor may be in check. Furthermore, an equal-weighted version of the S&P 500 recently reached a historic high, signaling a broadening of the rally. Valuations of the benchmark's major stocks remain below levels observed for market leaders during previous market cycles.

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Scott Chronert at Citigroup highlights that the seven mega-cap tech firms contribute around 20% to S&P 500 earnings, justifying their market capitalization weighting of about a third of the index.

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Despite the comparison with past boom-and-bust cycles, several charts dispel concerns of a bubble forming:

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Megacap Divide: The Magnificent Seven, including Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia, and Tesla Inc., moved in tandem last year, dominating the market's gains. However, in 2024, these stocks have diverged, signaling diminishing frothiness.

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More Participants: The S&P 500 Equal Weight Index recently set a closing record, indicating that the rally extends beyond technology stocks. The share of S&P 500 stocks at all-time highs has risen, leaving room for the bull market to attract more participants.

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IPO Blues: Investors' limited appetite for new listings suggests sentiment lacks the euphoria typically seen during bubbles. Comparisons with 1999 reveal a stark difference in the number of IPOs with significant share price pops.

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Valuations Compared: While robust profits from tech behemoths have brought down valuations, they remain relatively stretched, though still below prior peaks. The largest five S&P 500 stocks today trade at less than half the multiples of top stocks in early 2000.

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These indicators collectively suggest that, despite the rapid ascent, the current market rally may not be indicative of a speculative bubble. The nuanced performance of key stocks, the broader market participation, and contained valuations across various metrics contribute to a more balanced assessment of the market's current health.

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