Nvidia rebound fuels Nasdaq rally as Dow falls 300 points

This year’s stock market rally was led by a few big tech names — but that may not be a bad thing.

Yahoo Finance’s Josh Schaeffer has the scoop:

“We see a small group of technology winners driving stock gains as a feature of the AI ​​theme — not a bug,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a research note on Monday. “We remain overweight US stocks.”

AI darling Nvidia (NVDA) has accounted for nearly a third of the S&P 500’s gains this year, and the outperformance in quarterly results from large-cap tech continues to be the reason the S&P 500’s earnings have grown year after year.

As of Monday’s close, Apple (AAPL), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Broadcom (AVGO) also contributed more than a quarter of the benchmark index’s gains.

One potential concern is that the market could be at risk if some of the big tech companies that drove the lion’s share of the gains stop surprising to the upside.

However, research by Mike Wilson, chief investment officer at Morgan Stanley, shows that this may not be a problem.

Wilson finds that roughly 20% of the top 500 stocks outperform the broader index over a one-month rolling period. This is the lowest proportion of outperforming firms in the Wilson data set dating back to 1965.

Wilson’s work noted that after similar readings in a narrow range where fewer than 35% of companies were outperforming the index on a monthly basis, the S&P 500 rose about 4% on average over the next six months.

“The tight range can continue, but it’s not necessarily a headwind to returns per se,” Wilson said. “We believe expansion will likely be limited to high-quality/high-volume pockets for now.”

When you consider the impact of higher interest rates on companies, this makes sense, Wilson said. Investors have dumped large-cap stocks that have held up well in a high-rate environment and are seeing higher earnings growth than their smaller peers.

A slew of recent upgrades to the S&P 500’s year-end targets reflect similar sentiments. Three Wall Street firms pointed to the outperformance of technology as part of the reason the index is performing better than they initially thought this year.