For equity investors, bigger is not always better, especially when the entire market’s returns rely so much on so few mega stocks.
It remains to be seen whether that plays out once the artificial intelligence frenzy currently dominating markets starts to fade. Perhaps it will be different, and AI drives a productivity boom that boosts earnings across the board. According to Ed Clissold at Ned Davis Research, the percentage of stocks outperforming the S&P 500 this year is just 24.5%. If that holds to Dec. 31 it will be the lowest in at least 50 years.
“The AI scene could keep this narrow rally going, but ultimately, a year out, the message for the market is – either we have a substantial correction, or a broadening out needs to happen,” he said.Debate over the narrowness of the market rally has intensified after chipmaker Nvidia was briefly catapulted into the $1 trillion company club alongside Apple, Microsoft, Amazon and Alphabet.
Contrast that with the relative performance against the index in the three, five and 10 years after becoming a top 10 stock: up 0.7%, down 0.6%, and down 1.5%, respectively. Nvidia’s 12-month forward price/earnings ratio was above 60.0 just before its blowout sales forecast on May 24. The stock is getting cheaper thanks to the surge in predicted revenues, but a PE of 45.0 is still well above the industry average of 18.35, according to Refinitiv.
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