Investors shouldn’t be overly concerned about the significant concentration of mega-cap technology stocks, according to a leading strategist.
What happened: Brian Belskithe chief investment strategist of BMO Capital Markets, believes that the current market risk due to the dominance of mega-cap technology stocks is overstated. It said in a note Tuesday that the risk isn’t as bad as some might think, Business Insider reported.
The “Magnificent 7” mega-cap tech stocks, including the Apple company AAPL, Microsoft Corp MSFT, Alphabet Inc GOOGLE GOOG, Amazon.com Inc AMZN, Meta Platform Inc HALF, NVIDIA Corp NVDAAND Tesla Inc TSLAthey currently represent 29% of the S&P 500 Index.
While a potential decline in demand for these stocks poses a risk, Belski is confident that the broader market can still produce positive returns even if mega-cap tech stocks falter.
“Our work shows that the stock market has held up well in prior periods, when the outperformance of large-cap stocks began to decline,” Belski said.
“In fact, the only period where the index posted a loss occurred in 2001 (tech bubble) and, as we have mentioned quite often in recent reports, we do not consider this a comparable period despite some recent chatter to the contrary.” Belski said.
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He pointed out that historically the stock market has performed well when the outperformance of large-cap stocks has begun to wane. He also noted that a 10% correction in the second year of a bull market is typical and should not discourage investors.
From a valuation perspective, Belski believes the other 490 stocks in the S&P 500 are trading just above their long-term average P/E ratios. Their earnings also appear to have bottomed out in 2023 and are now improving.
Because matter: Belski’s comments come amid a bull market. On Wednesday, the S&P 500 rose to an intraday high of 4,995 points, boosted by robust corporate earnings. The “magnificent seven” technology stocks, including Apple, Microsoft and Alphabet, have collectively surpassed the market capitalization of $13 trillion, underlining their dominant presence in the market.
Belski previously predicted strong stock market performance in 2024, even in the face of a potential recession. He set a year-end 2024 S&P 500 price target of 5,100, signaling a potential 12% upside from current levels, driven by factors such as declining inflation, a robust labor market and rising of company profits.
Meanwhile, Fundstrat’s head of research, Tom Leewas also bullish on stock market strength in 2024, despite concerns about corporate earnings and the timing of Fed rate hikes. The Fed’s recent meeting did not suggest any imminent rate cuts until inflation is below control, a sentiment echoed by the Fed chair Jerome Powell.
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