By Vildana Hajric and Jeran Wittenstein | Originally published on

The same handful of megacap names that led the market down have been powering the latest surge.

Call it a bubble or an artificial-intelligence-driven hype cycle. But here’s another way of looking at the rally that sent the tech-heavy Nasdaq-100 to its best-ever first-half performance: a narrative round trip.

Only about a half-dozen companies are responsible for virtually all of the advance, leading to a lot of investor angst over how precarious the gains feel. But it’s possible to look at the same set of facts and conclude that nothing has changed in the market over the past 18 months. The clutch of technology giants that dominate the market got crushed when it seemed as if the US Federal Reserve would drive the economy into a recession, and in 2023 that view has been reconsidered.

The symmetry is weirdly precise: Although the Nasdaq-100 badly trailed the broader market in 2022, plunging 33% while the S&P 500 fell 19%, the two benchmarks are almost exactly even when measured from the start of 2022: down about 7%. In other words, if you hung on to tech stocks through the past 18 months, you had a volatile ride but ended up where you would have in a broad index fund.

Earnings projections go a long way in explaining the turnaround. After shrinking last year, profits for the five biggest companies in the S&P 500— Apple, Microsoft, Google parent Alphabet, and Nvidia—are projected to rise 16% in the quarter that ended in June and accelerate in each of the next two quarters, according to data compiled by Bloomberg Intelligence. Profits for all companies in the index, by contrast, are projected to drop about 9% on average.

Nancy Tengler, chief investment officer of Laffer Tengler Investments, says she took some heat in the autumn for scooping up technology stocks. “They were all delivering strong earnings growth, but they weren’t getting rewarded last year because everybody was trading them on interest rates,” she says. “We knew we were going into a slowing economy, and so what we want to own in a slowing economy is reliable earnings growers.” At a moment when investors still anxiously scan economic data for signs of a recession, Big Tech has come to be seen, oddly, as a kind of haven.

“We knew we were going into a slowing economy, and so what we want to own in a slowing economy is reliable earnings growers.

Nancy Tengler, CEO & Chief Investment Officer, Laffer Tengler Investments

All of this brings investors back to an uncomfortable place. Not only is the Nasdaq-100 driven by just a few stocks, but the same companies are also gobbling up a lot of the S&P 500, the same way they were in early 2022. If you own an S&P 500 index fund, it can seem like you effectively own a technology fund. The seven largest stocks—adding Meta Platforms Inc. and Tesla Inc. to the other high-tech five—now make up 28% of the S&P 500 Index’s total value, up from 20% at the start of the year, with a combined market value of around $10 trillion.

Pools of ink have been spilled about the dangers of getting caught in a rally led by so few stocks. If only one or two of them falter, the argument goes, the bull run can quickly fade. But this is also a tough situation to avoid; the top 5 or 10 names in the S&P almost always take up a large chunk of the index, which is weighted by market value. “Overreacting to that has never done you any favors,” says Art Hogan, chief market strategist at B. Riley Wealth. “It’s the way things have worked for decades.”

History shows that it’s not uncommon for a mere handful of companies to account for a majority of the market’s wealth creation. Fewer than 5% of stocks account for the bulk of the market’s return over the past century, according to prior research from Hendrik Bessembinder at Arizona State University. His new paper also finds that the pool of superstar companies may be shrinking over time.

A narrow rally is not a reliable signal of a bear market to come, according to data going back to 1993 compiled by BMO Capital Markets. Following streaks when the five largest stocks outperform the S&P 500, the broader market tends to hold up.

That’s not to deny that the stocks leading the market look expensive now. The frenzy around AI—and the belief that tech behemoths with their vast scale and resources are best positioned to capitalize on advancements in the field—is bleeding into valuations. The seven biggest companies have an average price-to-projected-earnings ratio of about 36. That compares with 19 for the S&P 500. “I think that may start to be a headwind for some of those tech names and give an opportunity for some of those other 492 names to get some wind under their sails,” says Victoria Fernandez, chief market strategist at Crossmark Global Investments. “We want to continue to have exposure, but we want to be more tactical.”

Tengler remembers trading in the dot-com bubble and says this period is not that kind of bubble. “These companies are not trading at 150 times peak earnings,” she says. “I was managing money through that, and it was ugly, and it deflated very quickly. This is not that.”

Timing when to hop in and out of a specific stock is notoriously hard; it’s an argument for staying diversified and riding though periods of narrow or widely dispersed markets. After all, few professionals saw the latest rebound in Big Tech stocks coming: Most actively managed funds were underweighted in the megacaps coming into 2023, which is one reason most of them are also trailing their benchmarks this year, say Jefferies strategists Steven DeSanctis and Jane Gibbons.

The same caution applies to anyone trying to time the market in general. Investors who bailed last year thinking that 2023 would bring more of the same—more pain, that is—missed out on what may well be their best chance to make up for a lot of 2022’s losses.

“The problem with market timing is it’s inconsistent with the underlying philosophy of investing in stocks, which is that stocks really are for the long run,” says Ed Yardeni, founder of Yardeni Research Inc. “And if you get out, you have to be smart enough to get back in.”

—With Isabelle Lee, Lu Wang, Elena Popina and Jessica Menton

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