As AI mania heats up in the summer months, the tale of two markets facing investors is getting more and more extreme.
Last week, the Nasdaq 100 Index (^NDX) – which includes the Nasdaq’s 100 largest tech stocks – jumped more than 3% while the Dow Jones Industrial Index (^DJI) languished in the red. This is only the fifth such event since the dotcom bubble burst two decades ago.
Meanwhile, looking under the hood of the market, on Thursday and Friday, more NYSE-listed stocks hit new 52-week lows than new 52-week highs. Yet on both days, the Nasdaq 100 jumped more than 2%.
Each of these signals says something slightly different, but they all occur almost exclusively during times of market stress, such as bear markets and early-stage bull markets, when doubts are still front and center.
Broadly speaking, investors have depreciated in the overall market and are hoarding money in the high-profile AI trade, which is fueling the concentration of market gains in just a few companies.
Or, as Bank of America strategist Michael Hartnett calls these stocks, the “Magnificent Seven” — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).
In total, the seven major constituents of the Nasdaq 100 have risen by $3.35 trillion this year, while the bottom 93 have only risen by $635 billion.
That means Hartnett’s “Magnificent Seven” accounts for 84% of the $4 trillion growth in the Nasdaq 100 market valuation in 2023. Apple and Microsoft have each gained more in value than all of the bottom 93 stocks.
Although the lion’s share of valuation gains are concentrated in a few large stocks, several software and chip companies riding the AI wave are also producing outsized returns in May.
Chipmaker Marvell Tech (MRVL) is up 65% this month after jumping 30% on Friday alone. The chipmaker expects to at least double its AI revenue in fiscal 2024.
Cloud-based security company Zscaler (ZS) is up 45% – second this month in the Nasdaq 100. And American Micro Devices (AMD) managed to beat Nvidia’s impressive performance in May after gaining 42% so far this month.
The chart below shows the cumulative return of Nasdaq 100 stocks in May (y-axis) compared to the cumulative return of the year 2023 (x-axis). The size of the bubbles increases with the evolution of the market capitalization in 2023. The points are colored according to the sector.
Unsurprisingly, the big blue dot in the very top right is Nvidia, the year’s top earner and one of May’s top earners. Its market capitalization has increased by more than half a trillion dollars, as has that of Apple and Microsoft.
The next four biggest gainers by market capitalization this year are Alphabet, Amazon, Meta Platforms and Tesla. After that, valuation gains plummet.
Meanwhile, retail names in the consumer discretionary and basics sectors took a beating in May as old areas of strength slumped again, another painful trade knocking investors back.
As the fight against the US debt ceiling appears to be headed for resolution and the Federal Reserve’s next move is now an open question for investors in the real world, markets have turned their attention to more artificial concerns. .
As Yahoo Finance’s Josh Schafer reported over the weekend, Citi strategists wrote in a recent note, “US markets are fueled by the Al theme, which tends to raise rate sensitivity even further.” This means the AI trade is now the Fed trade.
Or as BofA’s Hartnett wrote last week, “No belief in the 2023 macro-narrative means high belief in the new AI micro-narrative.”
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