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The market’s relentless rally has pushed the S&P 500 index up nearly 25% from its October lows, helped by gains in just a handful of stocks.
Leading the way is AI darling Nvidia (NVDA). The company is up more than 80% since the beginning of the year, helping push the S&P 500 (^GSPC) and Nasdaq (^IXIC) to record levels.
The intense outperformance has some on Wall Street warning that the rally has gone too far and declaring that stocks are in bubble territory.
Market concentration is at its highest level in decades. The top 10 U.S. stocks now account for 33% of the S&P 500’s market capitalization and 25% of the S&P 500’s profits, according to Goldman Sachs data.
But concerns about market participants’ narrowness and frothiness may be misplaced. Several top Wall Street strategists told Yahoo Finance’s Morning Brief last week that there is reason to believe the market will continue to rise.
“This may be the best sell-side trick right now…I don’t think it’s justified,” Drew Petit, director of U.S. equity strategy at Citi, told Yahoo Finance Live about bubble concerns. “It’s actually much healthier than people believe.”
Strong quarterly results from major tech companies have strengthened the bullish outlook. Nvidia had another explosive quarter thanks to a surge in AI demand, while META, Microsoft (MSFT) and Amazon (AMZN) beat expectations.
Higher profit margins and a proven It’s on the return.
“In our view, this is a far cry from the era of 1999-2000, when inflated valuations, lack of monetization and infrastructure, weak balance sheets, frothy business models, macro conditions, etc. It was a very different world than we see today,” Ives wrote in a note to clients.
Chris Daenley, head of U.S. semiconductor research at Citi, echoed Ives’ bullish view on the technology, telling Yahoo Finance, “There’s no end in sight.”
“We have a long way to go before we start ringing the alarm or hear the bells ringing,” Dainley said on Yahoo Finance Live.
Beyond technology, beneath the surface, the underlying trends are positive. The breadth of markets indicating bullish sentiment is starting to gradually improve. The S&P 500 Equal Weight Index (SPXEW) and small-cap stocks have outperformed the S&P 500 over the past month.
“The expansion that we’re seeing is happening stealthily,” Liz Ann Saunders of Charles Schwab & Co. told Yahoo Finance, adding that behind-the-scenes customer attrition “isn’t a bad thing.” he added.
And the important thing to note is that history shows that a rise in concentration does not necessarily indicate a market top. Goldman Sachs analyzed market concentration over the past 100 years and found that the S&P 500 Index frequently rose following past concentration peaks.
“One consistent pattern during periods of heightened concentration is large swings in momentum,” Goldman Sachs equity analyst Ben Snyder said in a note to clients. “While the high momentum leaders’ performance was inconsistent, the former laggards were absolutely highly rated in every episode. This means that “catching up” by the laggards is better than “chasing them.” This supports our view that the ongoing momentum rally is more likely to be disrupted than by recent market leaders. ”
sheena smith Anchor of Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Have a tip about a deal, merger, activist situation, or more? Email seanasmith@yahooinc.com.
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