As the AI mania accelerates in the summer months, a tale of two markets facing investors becomes more extreme.
Last week, the Nasdaq 100 Index (^NDX), which consists of the 100 largest technology stocks on the Nasdaq, rose more than 3%, while the Dow Jones Industrial Index (^DJI) languished in the red. That is only the fifth incident since the dot-com bubble burst two decades ago.
Meanwhile, looking under the hood of the market, more stocks listed on the NYSE hit new 52-week lows than new highs in 52 weeks on both Thursday and Friday. Still, the Nasdaq 100 was up more than 2% on both days.
Each of these signals says something different, but they almost exclusively occur during times of market stress, such as bear markets and incipient bull markets, when doubts still linger.
In general, investors have soured on the overall market and are piling money into the much-hyped artificial intelligence trading, which fuels the concentration of market profits in just a few companies.
Or as Bank of America strategist Michael Hartnett calls these stocks, the “Magnificent Seven” – Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA) , and Nvidia (NVDA).
All told, the top seven Nasdaq 100 components are up $3.35 trillion this year, while the bottom 93 are up just $635 billion.
This means Hartnett’s “Magnificent Seven” will account for 84% of the $4 trillion Nasdaq 100 market valuation by 2023. Apple and Microsoft have each gained more in value than the entire bottom 93 stocks.
While the lion’s share of valuation gains are concentrated in a few large stocks, several software and chip companies that are also riding the AI wave are posting outrageous returns in May.
Chipmaker Marvell Tech (MRVL) is up 65% this month after rising 30% on Friday alone. The chipmaker expects to at least double its AI revenue in fiscal 2024.
Cloud-based security company Zscaler (ZS) is up 45% — second this month in the Nasdaq 100. And American Micro Devices (AMD) managed to surpass Nvidia’s impressive return in May with a 42% gain year-to-date this month.
The chart below shows the month-to-date returns for Nasdaq 100 shares in May (y-axis) versus the year-to-date returns for 2023 (x-axis). The bubble size grows with the change in market cap in 2023. Dots are colored based on sector.
Unsurprisingly, the big blue dot at the very top right is Nvidia, the best riser of the year and one of the best risers for the month of May. Its market cap is up more than half a trillion dollars, just like Apple and Microsoft.
The next four biggest market cap climbers this year are Alphabet, Amazon, Meta Platforms and Tesla. After that, valuation gains decline.
Meanwhile, retail names in both the consumer discretionary and consumer staples sectors took a hit in May as former strong areas collapsed again, another pain trade that turned investors around.
With the fight against the US debt ceiling appearing to be moving towards resolution and the Federal Reserve’s next move now an open question for real-world investors, markets have shifted their focus to more artificial concerns.
As Yahoo Finance’s Josh Schafer reported this weekend, Citi strategists wrote in a recent note, “US markets are driven by the AI theme, further increasing interest rate sensitivity.” This means that the AI trade is now the Fed trade.
Or as BofA’s Hartnett wrote last week, “No belief in the 2023 macro story means strong belief in AI’s new micro story.”
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