Next week on Wall Street: the rise in US giant stocks leaves some wondering when to cash out

NEW YORK (Reuters) – As the U.S. stock market continues to rally, investors with shares in the tech and growth mega-caps are debating whether to cash out or stay the course.

$8.5 billion has poured into technology stocks in the latest week, data from BofA Global Research shows, as investors piled into a rally that saw the high-tech Nasdaq 100 (.NDX) index up 33% in 2023. S&P 500 (.SPX) ) increased by 11.5% this year and stands at a 10-month high.

Yet others see reasons for caution. Among them is the tightness of the market’s bullishness: The five largest stocks in the S&P 500 have a combined weighting of 24.7% in the index, a record high dating back to 1972, Ned Davis Research said in a recent report. Heavyweights could mean bigger ramifications for the broader markets if these names falter.

“We’ve had this big run and the main question is, do you think it’s going to last or do you think things are going to go back to the middle?” said Peter Tose, chairman of the investment board at Chase.

Excitement about advances in artificial intelligence is a key factor fueling gains in the outsized stocks. The most prominent drivers include Nvidia (NVDA.O) shares, which are up about 170% this year, while Apple (AAPL.O) and Microsoft (MSFT.O), the two largest US companies by market capitalization, are up about 40%.

Jay Hatfield, CEO of hedge fund InfraCap, believes excitement about artificial intelligence will continue to fuel mega-cap stocks. It’s overweight, including Nvidia, Microsoft, and Google-parent Alphabet (GOOGL.O).

“We believe 100% in the AI ​​boom,” said Hatfield. “I would be shocked if these stocks weren’t much higher by the end of the year.”

Reuters graphics

Data on Friday showed job growth in the United States accelerated in May, even as a rise in the unemployment rate indicated labor market conditions were softening, boosting investor appetite for stocks on hopes that the Federal Reserve will be able to bring down inflation without hurting growth too hard. The S&P 500 rose 1.45%.

Megacap shares led the markets for much of the decade after the financial crisis and betting on them was a risky strategy in 2023. Data from Bank of America showed investors’ allocation to cash is higher than it has been in the past, which some market watchers believe leaves many. of fuel to push the march even further.

The strong momentum could also continue to push stocks higher.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, May 22, 2023. REUTERS/Brendan McDiarmid

Michael Purvis, CEO of Tallbacken Capital Advisors, wrote earlier this week that technical analysis showed the Nasdaq 100 to be overbought, a condition that could make an asset more vulnerable to sharp declines. However, the index managed to rise another 10% over three months when it reached the same state two years ago, according to Purves.

Nvidia’s recent rally showed how the stock can continue to climb even after posting huge gains. Shares were already up 109% heading into its May 24 earnings report, but they’re up another 30% in the past week after the chipmaker’s surprisingly upbeat sales forecast.

Nvidia shares, which now trade at 44 times forward earnings estimates, according to Refinitiv Datastream, are getting “a bit rich,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management.

said Mahn, who said Microsoft shares remain attractive due in part to the company’s impressive cash flow and healthy dividend yield.

Others are growing more concerned, citing factors such as rising valuations and signs that the rest of the market is weakening while a small group of stocks is rallying.

The performance of just seven stocks, Apple, Microsoft, Alphabet, Amazon (AMZN.O), Nvdia, Meta Platforms (META.O) and Tesla (TSLA.O), account for total 2023 S&P 500 returns through May, according to S&P Indexes. Dow Jones.

At the same time, only 20.3% of S&P 500 stocks have outperformed the index on a three-month basis, a record low going back five decades, according to Ned Davis. And the company’s research showed that levels below 30% preceded the broader market’s poor performance, with the S&P 500 up 4.4% over the next year versus an average of 8.2% for all one-year periods.

David Kotok, chief investment officer of Cumberland Advisors, has in recent days reduced holdings of the iShares semiconductor ETF (SOXX.O) following the recent rally in Nvidia shares.

Kotok views the narrowing of the range as an ominous sign for the broader stock market, saying stocks also look less favorable on some asset valuation metrics.

In one commonly used valuation metric, the S&P 500 is trading at 18.5 times forward earnings estimates compared to its historical average of 15.6 times, according to Refinitiv Datastream.

“You can have focus (in the market) and it can last for a while,” he said. But he said, “For me, the narrowing is a warning.”

(Reporting by Louis Krauskopf) Editing by Ira Yosipashvili, Nick Zieminski, and Diane Kraft

Our Standards: The Thomson Reuters Trust Principles.

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