Five stocks propel US markets up 14% in the first half of 2024

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U.S. stocks closed the first half of 2024 14% above their start of the year on Friday, even as investors expressed growing concern about the narrowness of a rally in which only five stocks generated the essential to the gains.

The rise in the benchmark S&P 500 index was slightly less than that seen during the first half of 2023, but remains one of the strongest first-half performances since the dot-com bubble of the late 1990s.

However, nearly 60% of the year-to-date gains have come from just five mega-cap companies: Nvidia, Microsoft, Amazon, Meta and Apple, all of which have been fueled by investor frenzy over the potential of generative artificial intelligence. Nvidia alone accounted for 31% of the market’s gains in the first half of the year.

The rally has become even narrower in recent months, with Nvidia, Apple and Microsoft together accounting for more than 90% of the growth in the second quarter.

This masked weaker performance among many other index components. The equal-weighted version of the S&P 500 is up only about 4 percent year to date, and fell in the second quarter.

“There are growing signs of weakness developing beneath the surface of the market,” said Kevin Gordon, senior investment strategist at Charles Schwab.

It's not unusual throughout history to see the largest members account for big gains in indices, but when the rest of the market struggles, that's when the warning signs appear, he added.

Still, some investors hope that underperforming sectors will eventually catch up, without technology stocks seeing a turnaround, following a trend seen briefly in the fourth quarter of last year.

Artificial intelligence has taken up all the oxygen in the room, said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. It's so exposed that it's kind of left other areas behind.

“I think there are a lot of companies in areas like manufacturing and finance where business is very good, and yet they have been forgotten,” he added.

He also expressed optimism that the second-quarter earnings season, which begins in mid-July, would help focus attention on fundamentally strong companies.

It's the most concentrated market in at least 20 years, said Denise Chisholm, director of quantitative market strategy at Fidelity.

According to Chisholm, most investors influenced by comparisons to the dot-com bubble assumed that the current high level of concentration was inherently unstable. She argued, however, that there had been several previous periods where the market had remained very concentrated for a very long time.

I'm not saying this has to be a good thing, she added. But it's hard to come away as an investor with a data-driven approach and say this is definitely bad and I'm sure of it and I would bet my portfolio on it.

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