Investors Assess When to Cash Out as US Megacap Stocks Surge
As the US stock market continues its upward trajectory, investors holding shares of leading tech and growth companies are debating whether to cash out or ride the wave further. Recent data from BofA Global Research reveals a record $8.5 billion influx into tech stocks, driven by the tech-heavy Nasdaq 100’s 33% gain in 2023.
While some investors are optimistic about the ongoing rally, others urge caution due to the market’s narrowness. According to a recent report by Ned Davis Research, the five largest stocks in the S&P 500 now account for a combined weighting of 24.7% in the index, marking a record high dating back to 1972. Such heavy weightings imply that any underperformance or volatility in these megacap stocks could have significant repercussions for the broader market.
The surge in megacap stocks has been fueled, in part, by the excitement surrounding advances in artificial intelligence (AI). Stocks like Nvidia have seen remarkable gains, with an increase of about 170% this year, while tech giants Apple and Microsoft, the top two US companies by market value, have climbed nearly 40%.
Jay Hatfield, CEO of hedge fund InfraCap, remains bullish on megacap stocks, particularly those involved in AI. He is overweight on stocks such as Nvidia, Microsoft, and Google-parent Alphabet, as he believes in the continued growth of the AI sector.
The recent data showing accelerated US job growth in May has further bolstered investors’ confidence in stocks. The S&P 500 rose 1.45% in response to the positive job market outlook, as investors hope that the Federal Reserve can effectively manage inflation without hampering economic growth.
Despite the ongoing rally, concerns about valuations and market breadth persist. Some market observers highlight rising valuations and the apparent disparity between the soaring megacap stocks and the underperformance of the rest of the market. The performance of just seven stocks, including Apple, Microsoft, and Amazon, accounted for all of the S&P 500’s total return in 2023 through May, according to S&P Dow Jones Indices.
Additionally, a record low of only 20.3% of S&P 500 stocks have outperformed the index on a rolling three-month basis, according to Ned Davis. Historical data suggests that such low levels of market breadth often precede weaker overall market performance.
David Kotok, chief investment officer at Cumberland Advisors, has recently reduced holdings of the iShares semiconductor ETF following a spike in Nvidia’s shares. Kotok views the narrowing breadth as a potentially ominous sign for the broader stock market and expresses concerns about certain asset valuation metrics.
While the market concentration in megacap stocks may persist for some time, investors are advised to exercise caution and monitor indicators of market breadth and valuation. The narrowing of market breadth serves as a warning sign for some investors, urging them to carefully assess their investment strategies amid the ongoing surge in US megacap stocks.
