What's going on?
Big US technology stocks have been surging, raising questions about whether the surge has gone too far. Major companies driving this growth include Nvidia, Microsoft, Meta Platforms, Alphabet and Amazon.
What does this mean?
The S&P 500 is up 14.6% this year, with the gains being heavily concentrated in the information technology (28.2%) and communications (24.3%) sectors. In fact, roughly 60% of the index's total return so far in 2024 has come from just five companies: Nvidia, Microsoft, Meta, Alphabet, and Amazon. Nvidia in particular is up 155% year to date, but its shares have recently fallen 10% from their peak. The next best-performing sector is utilities, which is up just 9.5% this year, making other market segments such as small caps, value, financials, and industrials look like bargains to many investors.
Why should you care?
For the market: The gravity-defying act of technology.
Sentiment among retail and institutional investors is high, with the AAII Sentiment Survey indicating a 44% bullishness in the week ending June 19, and Bank of America Global Research noting the highest fund manager sentiment since the second half of 2021. However, concerns are growing that tech stocks may be overbought, with key indices such as the Relative Strength Index hitting record levels and the price ratio between the Nasdaq 100 and the S&P 500 Equal Weight Index increasing by 9%. Upcoming economic data, especially inflation rates, could influence investor behavior and lead to a shift of funds away from Big Tech and into cheaper segments.
Big picture: Rotation could be key.
Despite the potential for short-term pullbacks, the long-term benefits of the tech sector remain attractive, as evidenced by the fact that the Russell 1000 Value Index has risen 70% over the past decade, compared with over 400% for the Nasdaq 100. Small-cap stocks, however, have not performed as well, with the Russell 2000 down 0.5% year-to-date. A healthy rotation into other sectors could help sustain the current bull market, even if tech and semiconductor stocks fall. For example, the VanEck Semiconductor ETF has risen 13% this month, which could signal that AI fever may have peaked.
