In a striking turn of events, the S&P 500 has reached record levels for the first time in two years, driven primarily by the surge in the technology sector. With heavyweights like Microsoft, Apple, and Nvidia leading the charge, the tech industry's focus on artificial intelligence has propelled the broader market to record closes in five of the last six trading sessions.
While the S&P 500 is up 2.5% at the start of 2024, the tech segment has outpaced the broader market, registering a 5.9% increase. This stark contrast is highlighted by the fact that the remaining 10 sectors are trading an average of 15% below their all-time highs, with none setting new records in January. The equal-weighted S&P 500, considering both small and large companies, is down 0.3% this year.
The concern among some investors and strategists arises from the narrow nature of this rally. When only a handful of prominent stocks contribute significantly to market gains, there's a vulnerability to downturns if these heavyweights stumble. For instance, a pullback of six major tech stocks to their 200-day moving averages could potentially shave about 5% off the S&P 500, according to analysis from Bespoke Investment Group.
This trend of Big Tech dominance echoes the scenario from the previous year. However, the optimism surrounding an "everything rally" at the end of 2023 seems to be fading as economic data outperforms expectations. The benchmark 10-year Treasury note's yield has risen above 4%, prompting investors to revise their expectations for an imminent rate cut, potentially challenging the sustainability of stock market gains.
With attention turning to the Federal Reserve's policy meeting and a looming jobs report, the market awaits crucial indicators to gauge future trends. Earnings reports from tech giants like Microsoft, Meta Platforms, and Amazon.com will offer insights into the resilience of the market's gains.
While Big Tech stocks are not the only ones setting new highs in 2024, with companies like Berkshire Hathaway, Visa, McDonald's, and Marriott International joining the ranks, smaller companies have largely missed out on the rally. The Russell 2000 index, focusing on small-cap stocks, is approximately 20% below its November 2021 record.
Caitlin Frederick, director of financial planning at Ullmann Wealth Partners, suggests small-cap value stocks as an area with growth potential compared to larger growth stocks. The historical data indicate that market breadth indicators, such as the NYSE advance-decline line, are flashing warning signs, emphasizing the need for careful consideration in an environment of concentrated leadership.
Despite concerns, historical data suggests that periods of market highs often lead to continued gains. As the S&P 500 achieves a new all-time high after more than a year, historical patterns indicate a high likelihood of sustained rallies. In the face of this concentrated leadership, some market participants, like Ken Mahoney, CEO of Mahoney Asset Management, are cautiously optimistic. He emphasizes the option to focus on specific sectors rather than the unweighted S&P 500, citing that the market's advancement can continue with concentrated leadership.
