JPMorgan's team of quantitative strategists sees the dot-com bubble behind the stock market rally, which has driven the S&P 500 to new record closing prices six times since the beginning of 2024.
The continued rise in concentration in the U.S. stock market is a key risk investors should be aware of in 2024, according to a team of analysts led by Khurram Chaudhry. There are some key differences between the dot-com bubble and now, Chaudhry said. His team claims that his two eras are more similar than initially expected.
“When viewed in historical context, similarities to the “dot-com bubble'' era are often ignored due to the “irrational exuberance'' that characterized this era. This memo shows that there are many similarities between these two periods,” Chaudhry and his team wrote in a memo seen by MarketWatch on Tuesday.
This analysis comes as the skewed nature of stock market returns over the past year has strongly favored stocks of the largest publicly traded companies in the United States, nicknamed the “Magnificent Seven.” I was disappointed.
These stocks drove much of the S&P 500's 24.2% gain last year and have continued to outperform since early 2024, according to FactSet. As a result, concentration in the US market is nearing its highest level since 2000.
So, according to JPMorgan figures, the top five stocks accounted for 21.7% of the MSCI USA Index XX:984000 at the end of 2023, while the share of the top 10 stocks, including all the Magnificent Seven, was up to 29.3%. It has risen. For the top five, this level is within 0.7 percentage points of his 22.4% in March 2000, his post-1994 peak.
The current top 10 is slightly below its historic peak share of 33.2%, which occurred in June 2000. Still, on both measures, concentration is at its highest since the dot-com era.
The MSCI USA index has 609 constituent stocks and is designed to measure the performance of large- and mid-cap stocks listed in the United States, according to the index's MSCI fact sheet.
The JPMorgan team focused on several factors in their analysis. For example, they determined that the number of sectors in the top 10 most valuable companies is actually less diverse in 2024 than it was at the peak of the dot-com bubble.
At that time there were six sectors in the top 10 stocks, now there are only four. We also found that information technology companies accounted for the largest share of the group's total market capitalization in both periods.
Valuations, on the other hand, represent another important difference between the dot-com era and today. During the dot-com era, JPMorgan strategists found that the forward price-to-earnings ratio of the top 10 largest companies in the U.S. market peaked at 41.2 times expected earnings. Currently, the top 10 has a rating of 26.8x.
However, the JPMorgan team emphasized an important caveat. They took the inverse of the forward price-to-earnings ratio, a measure known as the forward earnings yield, to measure the spread between the top 10 stocks in the MSCI USA index and the rest of the index.
What they found was that as recently as October, the top 10 stocks in the index had the highest premium to earnings relative to the rest of the index on record. However, the premium has shrunk significantly since then.
Meanwhile, JPMorgan strategists found that the contribution of the top 10 stocks to overall EPS growth was actually greater during the dot-com era, when stock prices were completely decoupled from fundamentals. This helped to overturn the common wisdom of the time.
“While we hesitate to call the current level of the top 10 a bubble, it is certainly true that the top 10 during the dot-com era was backed by superior earnings development,” the JPMorgan team said.
Finally, the strategists measured the difference in price returns between the top 10 stocks and other U.S. indexes. They found that, generally speaking, periods of significant outperformance are typically followed by reversion to the mean.
This suggests that we are past the point where Big Tech lags behind the broader market, as it did in 2022. Alerted to the possibility of a Big Tech-led selloff, the JPMorgan team warned clients that “the stock market is certainly looking forward.” A drawdown could become a reality due to a slump in the top 10. ”
Most of Magnificent Seven's shares fell on Tuesday, along with Nvidia.
NVDA
and Tesla Inc.
TSLA
Stock flat, Microsoft Corporation
MSFT
and Alphabet Inc.
Google
Apple Inc.'s stock price fell less than 1%.
AAPL
and Amazon.com Inc.
AMZN
Stock prices fell significantly.Meta Platforms Co., Ltd.
meta
On that day, the company's stock was the only one among the group whose stock price increased.
The Nasdaq Composite Index fell 0.7% to 15,525 due to weakness in big tech companies. Meanwhile, the S&P 500 SPX fell 0.1% to 4,924, still within range of its recent closing high.
