The Megacap Tech Stock Rally Raises Concerns for Investors

2 Mins read

Investors spent 2023 expressing their concerns about the sustainability of a stock-market rally that was primarily driven by a small number of megacap tech stocks. As we enter the new year, these worries still linger while the S&P 500 returns to record levels.

Concentration-risk is a topic that frequently arises in client discussions and has become the major source of investor anxiety, explains Brian Belski, Chief Investment Strategist at BMO Capital Markets. The question on everyone’s mind is how a potential reversal in these trends might impact the stock market performance in the upcoming months.

However, Belski indicates that investors may be overestimating the risk associated with a megacap reversal and its effect on the ongoing bull market.

BMO’s analysis suggests that historical data provides some assurance. The S&P 500 has historically recorded favorable performance following peaks in relative performance of the ten largest stocks. Since 1990, the average return for the S&P 500 in the year after such peaks has been 14.3%. The only exception was in 2001 amidst the collapse of the tech bubble. Nonetheless, Belski argues that this period is not comparable to the current situation – a viewpoint that differs from recent commentary.

In 2023, the stock-market returns were largely dominated by the so-called “Magnificent Seven” stocks: Apple Inc., Inc., Alphabet Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc.

AI Hype and the ‘Magnificent 7’ Stocks

by Adam Turnquist and Belski

In today’s market analysis, we explore the continued hype surrounding the so-called ‘Magnificent 7’ stocks, and what this means for investors. The year 2024 has seen a further concentration of leadership, with Microsoft, Meta, Amazon, and Nvidia carrying most of the weight in the market.

It is undeniable that these mega-cap stocks have an outsized influence on market performance, especially considering their significant index weight. However, concerns arise when these stocks encounter difficulties, leading to worries among investors.

Nevertheless, it is crucial for investors to bear in mind that the second year of a bull market tends to experience a technical correction within the S&P 500. This correction is not enough on its own to negate the overall bullish outlook; even if highflying megacap stocks face challenges and cause broader market weakness, the bull-market trajectory remains intact.

Historically, the S&P 500 has encountered an average maximum drawdown of approximately 10% during the second year of bull markets. Therefore, it is important for investors to maintain an active and disciplined investment approach rather than being passive or reactive to short-term performance trends.

Today, both the S&P 500 and Dow Jones Industrial Average (DJIA) are set to achieve new record highs—reaffirming the strength of the current market.

Stay tuned for more updates on the ever-evolving market landscape.

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