Is the Record High in S&P Broad-Based or Is it Just Tech Stock Rally?
The stock market rally in 2023 has been one of the strongest in history, together with the covid surge, and it is continuing strong in 2024, with the S&P 500 above 5,000 and most major indices closing the week at record highs. But, is this a real rally across all sectors or is it just the main tech companies that are doing the heavy lifting while the rest are just dragging along, or even worse, in decline?
The recent surge in the equities market has indeed been largely driven by the dominant large tech companies. These companies have propelled indices like the Nasdaq 100 and the rest to record highs. At the close of the week yesterday, the market dynamics revealed a mixed picture, with more equities experiencing losses than gains, and only half of the sectors showing positive performance throughout the day. This does underscore some disproportionate concentration of profits among a select group of tech equities.
S&P500 Weight Index Showing Broader Market Rally
However, it’s worth noting that the positive momentum isn’t solely attributed to these tech giants. The equally weighted S&P 500 index, which gives each stock in the index an equal weight regardless of its market capitalization, also reflects the overall upward market momentum. This index has recently reached new record highs, albeit a bit slower than the real index. This suggests that the market’s strength is not exclusively dependent on a select few large companies but is spread across a broader spectrum of stocks.
Will the Stock Market Rally Continue Forever?
However, the valuation of equities has reached levels where investors are obtaining lower returns on their investments compared to safer alternatives like three-month Treasury notes. For instance, the future price-to-earnings multiple of the Nasdaq has surpassed 20 times, suggesting a potential return of around 5%, which is slightly lower than the 5.39% return offered by three-month US Treasury notes. This disparity in returns underscores the high valuation levels in the equity market relative to other investment options.
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