Investors Worried About Sustainability of Megacap Tech Stocks Rally
Investors have expressed concerns about the durability of the stock-market rally fueled largely by a handful of megacap tech stocks throughout 2023. These worries continue to persist as the S&P 500 has returned to record territory in the new year. Brian Belski, chief investment strategist at BMO Capital Markets, noted that concentration-risk worries have grabbed significant attention once again, as investors contemplate the potential impact on stock-market performance if these trends were to reverse in the coming months. Belski stated that this topic is frequently discussed in client conversations and appears to be the primary concern for investors.
Overestimating the Risk of a Megacap Reversal
While the concerns surrounding a megacap reversal are prevalent, BMO’s analysis suggests that investors may be overestimating the risk it poses to the bull market. Belski pointed out that historical data shows that the S&P 500 has performed well following peaks in the relative performance of the top 10 largest stocks. Since 1990, the index has averaged a 14.3% return in the year following such peaks. The only period when the index experienced a loss was in 2001, following the collapse of the tech bubble, which Belski argues is not a comparable period to the present.
The Magnificent Seven Stocks Dominated the Market in 2023
In 2023, the so-called Magnificent Seven stocks, which include Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla, dominated stock-market returns. These tech giants played a significant role in the market’s performance throughout the year.
Leadership Continues to be Concentrated in 2024
The concentration of leadership in the stock market has become even more pronounced in 2024. Microsoft, Meta Platforms, Amazon, and Nvidia are driving the majority of the market’s gains. Adam Turnquist, chief technical strategist at LPL Financial, highlighted this concentrated leadership in a recent note.
Hefty Index Weight and Market Performance
Belski acknowledged the significant influence that large stocks have on overall market performance due to their hefty index weight. If these stocks were to encounter challenges, it could potentially create market weakness. However, Belski emphasized that a struggling megacap sector alone would not be enough to negate the bull-market outlook. Investors should be aware that technical corrections are common in the second year of a bull market, and BMO believes that the current bull market began in October 2021, following the S&P 500’s bear-market bottom.
Remaining Active and Disciplined Amid Market Fluctuations
Given the historical trend of a roughly 10% maximum drawdown of the S&P 500 in the second year of bull markets, Belski suggested that investors should remain active and disciplined in their investment process. Rather than reacting impulsively to short-term performance trends, he advised investors to maintain a proactive approach. As the S&P 500 and Dow Jones Industrial Average were poised to finish at record highs, Belski’s insights provide a broader perspective on market fluctuations and the importance of a measured investment strategy.
Analyst comment
Positive news: The article suggests that investors may be overestimating the risk of a reversal in the megacap tech stocks rally, as historical data shows strong market performance following peaks in the performance of the top 10 largest stocks.
Market outlook: Despite concerns, the article suggests that a struggling megacap sector alone would not be enough to negate the bull-market outlook. However, investors should remain active and disciplined amid market fluctuations, maintaining a proactive approach.
