Talk about unyielding belief in the future power of artificial intelligence. The S&P 500 has never been more concentrated in two stocks than it is today. Nvidia (NVDA) and Apple (AAPL) represent over 15% of the index, Creative Planning chief markets strategist Charlie Bilello pointed out in a new chart (below).
This combined weighting is much higher than during the dot-com bubble period, when Microsoft (MSFT) and General Electric (GE) were the big dogs.
Nvidia and Apple hold the influence. · CPI Wealth
Tech stocks, at a glance: The rising importance of Nvidia and Apple reflects investor optimism around AI. For Nvidia, enthusiasm centers on strong demand for its AI chips. At Apple, there is hope that incoming CEO John Ternus executes strongly on various AI initiatives.
This overall momentum in tech hit a sharp roadblock in mid-May, however, as a wave of profit-taking swept through even the strongest of names.
The primary catalyst was an upside surprise in the April Consumer Price Index, which revealed annual inflation surged to 3.8%, heavily driven by oil spikes from the ongoing Iran conflict.
That deflated Wall Street’s hopes for near-term interest rate cuts, causing a swift sell-off in government debt. It pushed the 10-year Treasury yield to a 12-month high of 4.61%. Talk has shifted to possible interest rate hikes.
High-growth technology valuations rely heavily on discounting projected future earnings, so these rising yields have compressed stock multiples, forcing institutional investors to nervously de-risk their portfolios ahead of crucial megacap earnings reports.
Some of the more acute sell-offs have been concentrated in highfliers like Micron (MU) and Sandisk (SNDK).
Bottom line: Ideally, the gains in the market are powered more broadly by different sectors and stocks. The reality is that investors love tech and the financial potential AI is bringing to the table.
But words to the wise: Outsized concentration in a sector does tend to endure periods where it unwinds. The rise in box yields could be that moment…
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