Tech Stocks, Ahem, Sleigh-ed The Market In 2023

Tech Stocks, Ahem, Sleigh-ed The Market In 2023
Theodora Lee Joseph, CFA

about 2 months ago2 mins

One sector stole the show last year: tech. The advent of ChatGPT late last year spurred a whole host of artificial intelligence-related developments, with the tech sector catapulting the Nasdaq 100 up 54% and giving the S&P 500 a 24% boost. But while it’s impressive that very few companies are leading this charge, that very fact may become cause for concern next year.

The S&P 500 is more concentrated than it has ever been, with Apple alone on the verge of outshining France's entire stock market. That means investors are hitching a ride on a shrinking number of companies for their returns. In fact, the top-ten companies are now worth as much as the bottom 415. That number was 294 a decade ago.

We’ve seen tech dominate like this before, back during the dot-com bubble. The key difference is that this time, the “Magnificent Seven” companies are swimming in cash, raking in profit, and boasting growth rates and margins double that of the rest of the market. Those fundamentals arguably justify high valuations, and Big Tech companies are trading fairly in line with their historical values. Plus, given their unique competitive advantages, it seems like this concentration trend might stick around for a while.

A top-heavy market doesn’t necessarily mean future returns will take a hit. Far from it: history says market gains often come from a handful of companies. And even after the top-five stocks have had their moment, the S&P 500 has historically risen by an average of 6.7% in the next six months. Goldman’s not worried anyway, having recently raised its 2024 S&P 500 target by 8%, forecasting that falling inflation and weakening interest rates will be a buoy for US stocks.

In short, the bulk of your returns might only be driven by a handful of companies, but that’s no reason to fear investing. If you’re still worried about market concentration risks, you could consider buying an equal-weighted market index like the Invesco S&P 500 Equal Weight ETF (ticker: RSP; expense ratio: 0.2%) or the iShares S&P 500 Equal Weight UCITS ETF (EWSP; 0.2%). They help ensure that you hold an equal dollar amount of all the companies on the index. And if you're a tech enthusiast but still worried about the Magnificent Seven being overhyped, you could explore smaller tech companies that are likely to benefit indirectly from the AI boom.



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