Wall Street Week Ahead: Rally in US big tech stocks may be getting stretched

NEW YORK: A blistering rally in US big tech stocks may be due for a breather, offering hope for market segments that have been more tepid this year.

Although the S&P 500 is up 14.6% this year, most of the broader index’s gains have been concentrated in the information technology and communications sectors - up 28.2% and 24.3%, respectively. The rest of the market has been more subdued: the next best performing sector, utilities, is only up 9.5% year-to-date.

Many investors believe the long-term case for tech stocks is solid, given their strong earnings and excitement over the revolutionary potential of artificial intelligence. But huge price gains, including Nvidia Corp’s 155% year-to-date run, have stirred worries that the tech rally might be overheated.

Market laggards such as small caps and so-called value stocks such financials and industrials may be looking like bargains.

“Nvidia has been a rocket ship, and when things go up this quickly you don’t want to be the last one through the exit door,” said Michael Purves, CEO of Tallbacken Capital Advisors. “People want to be invested in this equity rally, and if they sell Nvidia the most likely places they are going to go is value and cyclical stocks.” A rotation out of big tech could allay concerns of concentration that have arisen in recent weeks, as the market rally has once again narrowed to a handful of names. About 60% of the S&P 500’s total return of more than 14% for the year has been driven by five companies whose shares have some of the heaviest weightings in the index: Nvidia, Microsoft, Meta Platforms, Alphabet, and Amazon.com , data from S&P Dow Jones Indices showed.

Some signs of big tech exhaustion emerged in the past week. Nvidia shares are down 10% from their peak reached on Thursday, taking the chipmaker out of its short-lived position as the world’s most valuable company. Nvidia is on track for a 4% decline for the week, while the S&P 500 is on track for a less than 1% gain.

Closely watched economic data in the week ahead, including inflation data on Friday, could also affect investor positioning, as market participants gauge whether a nascent slowdown in inflation is continuing.

Tech appears over-extended based on several barometers, Purves noted. The Relative Strength Indicator of the Mag6 Index, which measures the speed and magnitude of price changes in the stock market’s six biggest stocks, is at the highest it has ever been, he said.

Meanwhile, the price ratio between the Nasdaq 100 and the S&P 500 Equal Weight Index - a proxy for the average stock - has jumped 9% since the beginning of June, he said. The S&P 500, by contrast, is up nearly 4% this month.

Optimism is high among retail and institutional investors, which some view as a contrarian indicator because it means the bar for positive surprises is elevated. The AAII Sentiment Survey was steady at 44% in the week ended June 19, about 8 percentage points above its historical average. Sentiment among fund managers in the latest survey by BofA Global Research was at its highest level since late 2021, with investors trimming cash positions and increasing equity allocations.