Nvidia rebound fuels Nasdaq rally as Dow Jones drops 300 points

This year’s stock market rally has been led by a handful of 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 the large-cap technology continues to be the reason behind the S&P 500’s earnings growth year over 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 in danger if a few of the big tech companies that led 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 consecutive monthly period. This is the lowest percentage of companies outperforming the index in the Wilson data set dating back to 1965.

Wilson’s work noted that after similar broad readings where less than 35% of companies outperformed the index on a one-month 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 technology’s outperformance as part of the reason the index has performed better than they initially thought this year.