With stellar earnings powering stock indexes to all-time highs, Wall Street now wants to see the market broaden.
“Any time you have narrow leadership, despite what is doing the leading, it just creates more of a fragility in markets in general,” Matt Stucky, Northwestern Mutual Wealth Management chief portfolio manager, told Yahoo Finance last week.
“That growth in the fundamentals, even though it’s broadened some, it is showing up in more concentrated markets today,” he added.
The main driver of the stunning V-shaped recovery from the March 30 lows has been semiconductor stocks, especially memory makers.
When Micron (MU) crossed the $1 trillion market cap for the first time this past Tuesday, it became the 11th-largest US public company by market value, behind Eli Lilly (LLY) and ahead of Walmart (WMT). Its sharp rally that day accounted for 18 of the S&P 500’s (^GSPC) 45-point gain, according to data from Bespoke Investment Group.
“Semiconductor and memory-related stocks have experienced parabolic advances,” said Adam Turnquist, chief technical strategist at LPL Financial.
“While overbought conditions alone are not necessarily bearish, the probability of near-term profit taking or rotational activity appears to be rising as investor positioning becomes increasingly crowded,” he noted.
Turnquist pointed out that only about 60% of S&P 500 stocks are trading above their 200-day moving average, below the historical average of roughly 73% when the index is hitting new highs.
Within the Dow Jones Industrial Average (^DJI), which recently notched new highs on Wednesday, fewer than half of the index’s components contributed to the gains over the three-month stretch between its record peaks.
Talk of lower interest rates would have to come back for investors to see a broader rally into the more cyclical parts of the economy, per Turnquist.
For now, market bulls point to an expanding AI trade encompassing server makers and networking and infrastructure players. Legacy computer maker Dell (DELL) soared over 50% last week on accelerating demand for AI servers.
“This is what an AI supercycle looks like,” Evercore ISI analyst Amit Daryanani wrote in a note.
Rival Hewlett Packard (HPE) also jumped 12% as AI “picks and shovels” stocks caught the next wave of the AI trade. Even names like Ford (F) have caught interest on the back of a $2 billion investment in energy storage. The stock is up more than 30% year to date.
Shares of Caterpillar (CAT), known for its tractors, have surged 45% amid a boom in the company’s Power and Energy unit.
B. Riley Wealth chief market strategist Art Hogan noted that during the dot-com bubble, the Nasdaq Composite (^IXIC) traded at roughly 150 to 200 times earnings, meaning investors were paying extremely high prices relative to companies’ profits.
Today, by comparison, the Nasdaq is trading closer to 25-35 times earnings, which Hogan argued is far more grounded in actual revenue and profit growth.
“Clearly, these are very important companies,” he said, “but they’ve gotten here taking the long road to being fundamentally driven and important in the artificial intelligence revolution.”
UBS strategists noted equities will rise further over the medium term, with a year-end target of 7,900 for the S&P 500.
The firm expects the next phase of the market rally to feature “a broadening of leadership beyond the megacaps,” along with more sector rotation and periods of volatility as investors shift capital into other areas of the market.
Rather than abandoning AI and tech altogether, UBS recommends diversifying into other regions and sectors, including global healthcare, industrials, infrastructure, and power, arguing that “the impact of AI is expanding into other sectors” beyond just the largest tech companies.
Ines Ferre is a Senior Business Reporter for Yahoo Finance covering the US stock market, publicly traded companies, and commodities.
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