Bothered By This Narrow, Tech-Led Stock Market? Maybe You Shouldn't Be
Three investment experts weigh in on the market's narrowness, leadership by technology, and what investors should do in response.
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Is the stock market too narrow? Is it really just a handful of tech stocks propping up the averages? What should you do with your portfolio, given these concerns?
A trio of MoneyShow’s top contributors weigh in on the debate this week — and share their best recommendations with you.
JC Parets All Star Charts
Tech: Yes, the Best Players are Scoring a Lot of Points - and That's NORMAL
It's not a bad thing for America, Americans, or the American stock market that the largest companies in the country are going up in price. The best players are scoring a lot of points. That's perfectly normal. In fact, if you go back and study every bull market over the past 100 years, you'll notice that technology is a leader in almost every single one of them, writes JC Parets, founder of AllStarCharts.com.
Tech stocks doing well, and outperforming other sectors, is just a classic characteristic of a bull market.
The 2-year anniversary of this bull market is Sunday June 16. That’s when the new lows list peaked at the end of the last bear market that first got going back in 2021.
Here...look for yourself. These are the returns for every sector going back to the beginning of this bull market:
Technology is a standout leader. But Communications and Industrials are rounding out the top three. Then Financials and Consumer Discretionary represent the rest of the top five.
These are the types of sectors you would expect to see leading during bull markets. More defensive areas like Real Estate, Utilities, and Consumer Staples underperforming is also perfectly consistent with other bull markets from the past.
There are opportunities to buy stocks here. The question people are asking is: Sure, but which ones?
Nancy Tengler Laffer Tengler Investments
Don't Let Hedge Fund Selling Scare You Out of These Market Leaders
The great Peter Lynch once said, “The real key to making money in stocks is not to get scared out of them.” Hedge fund traders can be frightening as they move rapidly and often in tandem but most importantly, they are fickle. The sell-off in software stocks is the most recent example. But I have been saying for years that these companies are the new defensives, observes Nancy Tengler, CIO at Laffer Tengler Investments.
Goldman Sachs reported that institutional investors sold technology stocks at the highest level over the last 11 weeks. Some 60% of that selling was in software stocks.
My experience has shown, and the hedge funds’ collective performance has confirmed, that it often makes sense to take advantage of the volatility they create. Look no further than Nvidia Corp.’s NVDA stock powering ever higher after the recent earnings report. Why? Because the hedge funds are piling in. Chips, chips, chips, and more chips!
Salesforce Inc. CRM spooked the market with weak guidance. I think that is more about CRM’s model and limited use cases for AI in their software offering than a verdict on all software companies – particularly the cloud hyperscale’s. Cloud computing accelerated last quarter at Amazon.com Inc. AMZN, Microsoft Corp. MSFT, and Alphabet Inc. (GOOGL).
They continue to turn in double digit earnings growth, they outearn the SPX, dividends and dividend growth are increasingly in the mix, and they are actually benefiting from higher interest rates.
Finally, I want to share a few words about S&P 500 concentration. We hear it repeated almost daily that the market is being driven and dominated by the Mag Seven, the Fab Five, or simply NVDA. But it is important to note that the SPX is the least concentrated index of the major developed global indices.
See the chart above from our friends at Strategas.
Carl Delfeld Cabot Explorer
ASML: A Chip Equipment Play in a Strong, But Narrow, Market
Inflation cooled for the second straight month in May, the US labor market seems back to pre-pandemic levels, and the economy is expanding at a low but steady pace. Therefore, the Fed is holding back on interest rate cuts. Probably the right move. Keep the ammo dry for when it is really needed. Meanwhile, I like ASML Holding NV ASML, writes Carl Delfeld, editor of Cabot Explorer.
A wall of active and passive money flows still supports the stock market, though the narrowness of the rally bothers me a bit. The 10 largest stocks represent about 34% of the value of the S&P 500 versus 27% in 2000 – right before the sharp dotcom-era pullback.
Volatility is also picking up, with more stocks experiencing sharp swings even on days that the overall market moves very little. This ought to be a great setup for stock picking. My goal is to help you navigate the risk and uncertainty that is out there, but not at the expense of missing out on opportunities.
This is why we start with a solid ETF base, add some dominating blue-chip stocks, and then add a layer of disruptive, aggressive stocks that offer us more upside potential for taking on more risk and volatility.
The key is to have some balance – to avoid going overboard in any sector or chasing any trend since the future is unknowable.
As for ASML, its shares recently popped from 1,045 to 1,069 in their first week as a recommendation. ASML makes the lithography equipment that manufacturers use to make advanced chips.
By 2026, ASML’s revenue could reach at least $40 billion as the market for AI chips is projected to grow at an annual rate of 36% through 2030. This is an aggressive stock trading at a high multiple to earnings and sales, so you may want to move incrementally in building a position.
Recommended Action: Buy ASML.