Just 5 stocks, including Nvidia, account for 96% of S&P 500 gains this year

On May 30, Nvidia made headlines by reaching the $1 trillion super-exclusive club for the first time. The maker and designer of AI hardware and software hit a major milestone by increasing its valuation to $280 billion, or nearly 40% since May 15, achieving a nearly unparalleled moonshot in the annals of the markets. capital (it closed just below this mark).

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But the Nvidia phenomenon has a dark side. It epitomizes the epic, oversized jump in market capitalization this year for all members of the Trillion-Dollar Club. Indeed, the five members now boasting 14-digit valuations are practically devouring the S&P 500 index. That’s not a good thing. Their synchronized surge is the only force that has lifted the large cap index this year. And because it has made companies that were expensive before their recent take-off even more expensive, it is extremely unlikely that they will be able to carry the markets higher on their less than half a dozen shoulders in the future. Most likely, their valuations are already stretched beyond the maximum and doomed to roll back. And the ultimate example of the foam that has overtaken the Trillion-Dollar Club is the rise of Nvidia.

The Trillion-Dollar Club accounts for nearly all of the S&P 500 gains this year

The Trillion-Dollar Club now includes Apple, Microsoft, Google parent Alphabet, Amazon and, starting Tuesday noon, Nvidia. From January to May, the members of the group all gained more than a third in value, with Apple stock up 35%, Microsoft 39%, Alphabet 41%, Amazon 43% and Nvidia 176%. Apple and Microsoft each added more than $700 billion in market capitalization in the past five months, followed by Nvidia ($640 billion), Alphabet ($460 billion), and Amazon ($371 billion). In total, current Trillion-Dollar Club members have increased their combined market capitalization by $2.87 trillion since the start of 2023.

The catch is that the total rise in the large-cap index is only a hair’s breadth higher, at $2.98 trillion. As a result, the Club contributed 96% of the 9.5% year-to-date increase by the 500 this year. Let’s think of the Club as a company that we will call Big Five Ltd. Its valuation jumped 46.2% from $6.2 trillion to $9.1 trillion. In contrast, the other 495 cohorts of the 500 posted a combined gain of just 0.3%. Simply put, without the giant Trillion-Dollar Club elevator, the S&P would be flat for the year, instead of posting what Wall Street touts as a strong comeback.

The huge weight of the Trillion-Dollar Club makes the S&P 500 unbalanced

At the end of 2022, the current Club accounted for 17.6%, or about one in six dollars, of the total S&P valuation. Today, that figure is 25.6%, or more than one in four dollars. By increasing their overall value by nearly half by adding nearly $3 trillion in market capitalization, the Big Five have become much more expensive. In five months, their overall P/E – based on their total valuation divided by combined net earnings – fell from 27.7 to 40.6, meaning investors are getting 33% fewer revenue dollars for each $100 they’re investing now versus Christmas 2022 Incidentally, this current multiple of over 40 is almost double the 23 P/E for the entire S&P 500.

This is particularly troubling because since the start of the pandemic, the club has already achieved something of a miracle when it comes to income. In 2022, the Big Five raked in about $224 billion in net profits, 50% more than their pre-COVID 2019 total. So the big multiple comes above what could well be unsustainable profits.

Suddenly, investors are expecting blazingly rapid earnings growth from four already huge, mature companies — Apple, Microsoft, Alphabet, and Amazon — and blazingly rapid growth from Nvidia based on touted hopes for AI. The hopes and prices are only too high. Bottom line: Nvidia’s rise symbolizes that the tech giants in the Trillion Club were getting more and more expensive, they made the index more and more expensive by gobbling up such a large share.

The return of the S&P this year receives only two cheers. The Trillion-Dollar Club outperforms, while the rest of the market reflects the reversal of a historic profit explosion. Soon, the Club will face the same gravitational forces that are holding back the rest of the market. And when the reversal occurs, it will exert an increased downward force on the overall index. A few mighty valiants cannot pull a caravan loaded with stragglers indefinitely.

This story was originally featured on Fortune.com

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