Tech Stocks Drive Nasdaq to Record Highs Amid Market Divergence
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US tech stocks, in particular the Big Tech names have created tremendous wealth for investors. On Friday, the Nasdaq closed at a record high for the fifth consecutive trading day even as the S&P 500 and Dow Jones closed lower for the day.
While the tech-heavy Nasdaq Composite is up almost 18% for the year, the Dow Jones is up a mere 2.4% while the Russell 2000 is in the red this year. Notably, while both the Nasdaq and S&P 500 have closed in the green in seven out of the last eight weeks, the Dow Jones has closed in the red in three out of the last four weeks.
Tech Stocks Drive US Stocks Higher
The rally in tech stocks in particular Nvidia which is now a $3 trillion market cap company has helped catapult the Nasdaq as well as the S&P 500 to record highs. We see a massive divergence in different sectors. For instance, the information technology sector was the best-performing S&P 500 subsector last week with gains of 6.4%. However, the real estate sector which was the second-best performer was up only about 1.2% with many leading sectors like banking closing in the red.
Chip Stocks Have Soared Amid the AI Euphoria
The top 2 gainers of the S&P 500 this year are Super Micro Computers and Nvidia. Micron, Qualcomm, and Broadcom are also among the top 15 performers as markets are upbeat on chip stocks amid the AI boom. The artificial intelligence (AI) euphoria was on full display last week as Apple shares rallied after the company unveiled its “Apple Intelligence” at the Worldwide Developer Conference last week.
The company managed to dispel fears that it was slacking in AI efforts and announced a flurry of AI features at the event.
Tech Shares Rally While Other Sectors Sag
Around 200 S&P 500 constituents are in the red this year even as the index is up in double digits and trading near its record highs. There has been a divergence in the fortunes of tech stocks and other sectors of the economy some of which are facing severe slowdown.
As Adam Sarhan, chief executive of 50 Park Investments in New York told Reuters, “You’ve had a big rally this week, led by big-cap tech. Under the surface, we have a lot of areas acting weak.”
Jeff Klingelhofer, co-head of investments at Thornburg Investment Management also echoes similar views and said, “Underlying equity indices in U.S. are being driven by a smaller and smaller subset of names.”
He added, “Today, it’s basically Magnificent One — Nvidia — and Nvidia’s an amazing, amazing company, but it isn’t the U.S. economy, and underlying overall stocks should represent the overall economy.”
Nvidia’s Stellar Rally
To be sure, Nvidia has seen a stellar rally over the last year. It became a $1 trillion market cap company just last year and is now a $3 trillion company. The company’s revenues and profits have spiked amid the soaring sales of its AI chips. However, many point out that the rally in tech stocks – especially Nvidia – does not mask the slowdown in other sectors. Many fear that the valuations of tech stocks are getting stretched and any correction in these names would drive US stocks lower in the back half of the year.
Can Both Tech and Other Sectors Rally in the Second Half?
Dave Donabedian, investment chief at CIBC Private Wealth is among those who believe that tech stocks can continue to rise in the second half of the year with other sectors also playing catch-up. According to Donabedian “You can have leadership from the technology space, but also have other sectors also going up.”
Donabedian, who is not too perturbed by the market valuations added, “So, I would say somewhere between now and the end of the year, the market will stumble and we’ll have a pullback or correction, because that’s normally what happens. But I think that the underlying fundamentals argue that by year end, we’ll be somewhat higher than we are now.”
All said, US tech stocks have resumed their leadership of the markets after the tumultuous crash in 2022. Tech stocks rebounded last year and have continued their good run in 2024 even as some are now fretting over signs of overvaluations in some names.
