How the S&P 500 became the S&P 10
How the S&P 500 became the S&P 10
The top 10 companies, led by Nvidia, are responsible for 60% of the increase in the S&P 500 this year. Can the rest catch up or is a crash looming?
The numbers are startling. Nvidia has overtaken not only Apple but also Microsoft, becoming the largest company in the world with a market value of $3.3 trillion, following an increase of about 180% from the beginning of 2024, or approximately $2 trillion. In just the past two months, the chip company has added $1.4 billion to its value every hour. The stock's cumulative return since its issuance in 1999 now stands at 591,077%.
With Nvidia's push and the support of other Big Tech companies, the S&P 500 index has shown a cumulative increase of about 15% so far this year. This has led many top minds on Wall Street to update their forecasts for the end of 2024, aiming more towards 6,000 points. The increase in the S&P 500 so far signifies a value addition of $5.5 trillion, surpassing the value of the entire British stock market, the largest in Europe. Meanwhile, the Nasdaq has jumped about 20% since the beginning of the year and increased about 30% in the last 12 months, reaching a record high of 17,862 points, set at the close of trading on Tuesday.
In other areas of Wall Street, things are moving more slowly. The current conversation often centers around the "lack of equality" in this rally. While tech stocks—especially Big Tech—are surging, this rally largely belongs to the technology sector, particularly in the field of chips and especially the large players. Smaller stocks in the S&P 500 and Nasdaq are not performing as well. For instance, the number of Nasdaq stocks at their annual lows is much higher than those at their peaks. In the Russell 2000, a second-tier stock index, two-thirds of the stocks recorded declines in the last quarter. There are also significant gaps within the S&P 500 itself. JP Morgan noted that last week, for the first time in history, the index rose by 1.5% while the Equal Weight Index fell by 0.5%, highlighting the disparity between large and small stocks.
Many on Wall Street are concerned about the current situation's health, fearing a potential collapse that might start with the Nasdaq and then affect the S&P 500. Wall Street historians remind us that similar gaps were last seen in March 2000. However, they were also present in March 2020 when the tech sector stood out due to the shift to working from home during the pandemic. The increases on Wall Street over the past six months are both disturbing and encouraging, occurring even before the beginning of interest rate cuts in the U.S.
This rally is driven primarily by AI infrastructure companies like Nvidia, enabling a dramatic technological leap. This is because many companies developing applications like ChatGPT are still private or, if public, like Google, less successful in this area. The clear business model of chip infrastructures for AI is evident in Nvidia's unprecedented performance over the past year. This focus on AI infrastructure, particularly chips, is further highlighted by the rise of Broadcom, which recently reached a value of about $850 billion after a significant jump, placing it eighth in market value, surpassing Tesla.
The increases on Wall Street are happening even before the start of interest rate cuts in the U.S. Analysts and economists had expected the US Fed to have already made several interest rate cuts by now, but this hasn't happened because the economy hasn't cooled enough. No one is urging Jerome Powell to start the process, as the stock market is soaring without it. However, many on Wall Street believe a rate cut is likely in September. Such a reduction could fuel stocks that have remained in the shadow of Big Tech, potentially averting the feared collapse.
Most hedge fund managers believe that the increases will continue. Looking ahead, the U.S. presidential elections in November typically help keep the stock market stable. A survey by Bank of America last week revealed that most hedge fund managers believe tech stocks will continue to rise, with 64% confident that the U.S. economy will achieve a soft landing in the next 12 months. American investors are now at a stage where some feel they missed out on the recent gains because they doubted the rally's sustainability without interest rate cuts. Despite concerns, the large gaps between leading stocks and the rest leave room for continued increases, even if at a slower pace. While the S&P 500's predicted profit multiplier is not low, excluding the top ten responsible for 60% of the increases, a much wider group of inexpensive stocks remains, especially if interest rates start to decline.
