Tech Giants Lead 2024 Market Surge: A Bullish Outlook
The current stock market rally has been significantly propelled by a select group of large technology companies. Despite potential concerns about the concentration of gains in a few stocks, strategists suggest this trend could be beneficial for the broader market.
Jean Boivin, head of BlackRock Investment Institute, views the dominance of a few tech winners as a positive aspect of the artificial intelligence (AI) boom. “We see a small group of tech winners leading stock gains as a feature of the AI theme — not a flaw,” Boivin noted in a research note on Monday. BlackRock remains overweight on U.S. stocks, underscoring its confidence in this trend.
AI powerhouse Nvidia (NVDA) has been a major contributor, accounting for nearly one-third of the S&P 500’s gains this year. Strong quarterly results from large-cap tech companies continue to drive year-over-year earnings growth for the S&P 500.
As of Monday’s close, other tech giants like Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Broadcom (AVGO) have also contributed more than a quarter of the index’s gains. However, there are concerns that if these key companies falter, the market could be at risk.
Morgan Stanley’s chief investment officer, Mike Wilson, suggests this concentration might not be problematic. His research indicates that about 20% of the top 500 stocks are outperforming the broader index on a rolling one-month basis, the lowest percentage since 1965. Historically, after such narrow breadth readings, where less than 35% of companies outperform the index on a one-month basis, the S&P 500 has risen by approximately 4% on average over the next six months.
“Narrow breadth can persist but it’s not necessarily a headwind to forward returns in and of itself,” Wilson explained. He believes that any broadening of market gains will likely be limited to high-quality, large-cap stocks, particularly given the current high interest rate environment. Investors have gravitated towards these large-market-cap stocks, which have shown resilience and earnings growth compared to their smaller counterparts.
Recent upgrades to year-end S&P 500 targets reflect a similar sentiment. Three major Wall Street firms have cited tech outperformance as a key reason for their improved outlooks. Evercore ISI’s Julian Emanuel raised his target to 6,000 from 4,750, citing the “early innings of AI” and market support from “AI exuberance.” Citi’s Scott Chronert increased his year-end target to 5,600 from 5,100, emphasizing the “weighting effect of the mega cap growth cohort” on index performance.
Goldman Sachs’ equity strategy team also revised their year-end target to 5,600 from 5,200, pointing to higher earnings expectations for Alphabet, Microsoft, Amazon, Meta, and Nvidia. These rising expectations have countered the usual pattern of negative revisions to consensus EPS estimates.
Goldman Sachs equity strategist Ben Snider explained to Yahoo Finance, “We underappreciated the degree to which those earnings would lift those few stocks and the degree to which those few stocks would drive the rest of the market, and that’s basically what we’re adjusting for.”
Goldman Sachs also outlined an alternative scenario in which the S&P 500 could surge to 6,300 by year’s end, driven by “further mega-cap exceptionalism.” Snider noted that this outcome would likely result from continued revenue beats by these companies relative to analyst expectations. While this could leave investors “vulnerable” to a few stocks, it also offers significant upside.
“The beauty of the S&P 500 index ownership in general is that when a few companies perform really well, they can drag up the whole index,” Snider said. “And we’re seeing that right now. So I think most investors who own the S&P 500 are very happy with what’s happened, even if it means their underlying portfolios are more concentrated.”
Conclusion
The concentration of market gains in a few large technology companies is a defining feature of this year’s stock market rally. While there are concerns about potential risks, strategists generally view this trend positively, driven by the ongoing AI boom and the resilience of large-cap stocks. Investors remain optimistic, bolstered by recent upgrades to year-end S&P 500 targets and the potential for continued tech outperformance. This focus on a few tech giants underscores the shifting dynamics in the market, reflecting the critical role of innovation and technological advancements in shaping future growth.
