Source: The New York Times
Translation: BitpushNews
The U.S. stock market is a miracle. Despite the many destructive policies of the Trump administration, it has found a path to prosperity.
Driven by the vision of advanced artificial intelligence (AI), tech stocks have soared. Nvidia, which produces a multitude of AI chips, crossed a new market threshold this summer. It became the first company to surpass a market capitalization of $4 trillion, currently accounting for about 8% of the total market capitalization of the S&P 500 index.
According to 35 years of data tracked by the Minneapolis-based independent financial research firm Leuthold Group, Nvidia's current market share is larger than that of any company during this period.
Not just Nvidia, according to FactSet, there are nine other companies in the U.S. market with a market capitalization of at least $1 trillion. With the exception of Warren Buffett's Berkshire Hathaway, all of these companies are broadly considered tech stocks. Microsoft and Apple each have a market capitalization exceeding $3 trillion; Alphabet (Google) and Meta (Facebook) have market capitalizations over $2 trillion; followed by another large chip manufacturer, Broadcom, and Tesla (yes, it's a car company, but it has tech attributes). Berkshire Hathaway rounds out the list with a market capitalization of about $1 trillion.
Tech is king. I said this during the internet bubble of 1999, but it is even more true now: the concentration of today's stock market is far higher than ever before, showing a severe tilt towards rapidly growing tech stocks.
Investors heavily invested in tech stocks—now including everyone who holds the entire market through index funds—are profiting.
But when the stock market becomes so unbalanced, risks are everywhere.
Moving to Extremes
After a sharp decline in April due to the Trump administration's implementation of the highest tariffs since the 1930s, the S&P 500 index has experienced an unexpectedly good time this year. The tech sector has been the main contributor to these gains.
According to data from Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, as of July, the information technology sector, led by Nvidia, Microsoft, Broadcom, Palantir Technologies, and Oracle, contributed nearly 54% of the S&P 500's total return of 8.6%. The communication services sector, which includes Meta, Netflix, and Amazon, contributed another 15.4% to the S&P 500's return. Together, these two tech sectors contributed nearly 70% of the total return of the entire index.
When looking at individual stocks, the market appears even more top-heavy. Nvidia is the giant among them, contributing 26.2% to the total return of the S&P 500. Here are the next four largest contributing stocks:
- Microsoft, contributing 21.6% as of July.
- Meta, contributing 9.8%.
- Broadcom, contributing 8.3%.
- Palantir, contributing 4.5%.
If there is any difference, it is that these statistics underestimate Nvidia's role as a market pillar. In the race to build advanced generative AI, the company is both a key participant and a major beneficiary—this AI may one day surpass human intelligence in at least some aspects. An arms race has begun. Alphabet, Microsoft, Meta, and Amazon have announced plans to invest a total of $400 billion in capital expenditures this year, most of which will go towards AI infrastructure.
Utility stocks have risen alongside tech companies because AI data centers require massive amounts of energy—this development is not good for the environment or consumers' electricity bills, but it is necessary if AI computing power is to continue growing.
For now, the vast majority of AI spending is flowing to Nvidia. According to FactSet, the company's profits are extremely rich and growing rapidly, providing investors with astonishing returns—over the past five years, the annualized return, including dividends, has exceeded 70%. So far this year, Nvidia's stock has returned about 30%. The company is set to announce its earnings on Wednesday, and expectations are very high.
However, if the company fails to meet investors' expectations, caution is warranted. The AI stock market ecosystem that currently dominates the entire stock market will immediately experience tremors.
From certain metrics, Nvidia's ability to continuously generate growing profits is even more important for the entire stock market than whether the Federal Reserve will cut interest rates at its next meeting—this speaks volumes, given the Fed's significant influence.
Extreme valuations are permeating other parts of the market. Take Palantir, for example. It provides consulting services to the U.S. military and many large companies using advanced technology—and helped the Trump administration collect and organize personal information on millions of Americans. According to FactSet, all of this has made Palantir the best-performing stock in the S&P 500 this year, with a gain of over 100%.
Traders have pushed its stock price to extraordinary levels. According to FactSet, Palantir's price-to-earnings ratio (a standard valuation metric that compares stock price to company profits) exceeds 570 times, about 20 times the average level of S&P 500 constituents.
A recent article in The Economist claimed, "Palantir may be the most highly valued company in history." I wouldn't say it so definitively. After all, Palantir has substantial earnings (its CEO Alex Karp is also notable, ranking first in the latest New York Times list of executive compensation for U.S. publicly traded companies).
Then and Now
Many tech companies that were hot during the internet bubble never achieved profitability.
I think of Pets.com, which became famous in 1999 and 2000 for its comical "Sock Puppet" (a toy dog that appeared on television). When the company dramatically collapsed, it became notorious—symbolizing excessive speculation. When it filed for bankruptcy in 2000, many investors lost everything.
Comparing the loss-making companies of the internet bubble era with today's profitable but highly valued companies is not very meaningful. The situation is different now.
But in terms of market concentration, the current situation is more concerning. In 1999, Microsoft was the largest company in the market, but its weight in the S&P 500 index was relatively moderate, at only 4.9%. According to Mr. Silverblatt's data, that year Microsoft contributed only 11.9% to the index's total return.
Here are other top stocks from that year and their contributions to the S&P 500's 21% annual return:
- Cisco Systems, contributing 10%.
- General Electric, contributing 8.4%.
- Walmart, contributing 6.1%.
- Oracle, contributing 5.7%.
Together, the top five companies contributed 42.1% to that year's S&P 500 return—this is a huge number, but compared to today's top five companies contributing over 70%, it is small.
If these crucial companies—or the economy under Trump—encounter problems, the market may not have much of a foundation to rely on. Therefore, global diversification is needed, holding both stocks and bonds, and preparing for potential reversals in this incredible market.
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