Halfway through the year the broad stock market is up anywhere from 5 to almost 15%! The markets have been led by technology stocks that are mission critical to artificial intelligence or will facilitate productivity gains for employers. You’ve likely heard of the Magnificent 7 which includes Microsoft, Amazon, Meta Platforms, Apple, Alphabet, Nvidia, and Tesla.

When you remove these stocks from the S&P 500 the returns are much more muted and look more like the Dow Jones Industrial Average returns of mid-single digits.

The dramatic rise in these stocks can be attributed to quickly rising earnings and sales, as well as investors bidding up the valuation of these stocks and paying expensive multiples for the outsized growth.

Recently more and more market statisticians have commented about the valuation of Nvidia and other AI related companies as valuations seem stretched. Perhaps more concerning is that the broad stock market is very concentrated in these large stocks. JP Morgan wrote a research note that the top 10 stocks as a percentage of the market are nearing an all-time high in terms of concentration.

In momentum driven markets many investors end up taking too much risk near the market highs and the concentration risk of the top 10 stocks is probably the hidden risk in today’s markets.

Actively managed portfolios can better mitigate this risk by appropriately sizing positions for a portfolio and trimming winners and avoiding the most momentum driven stocks all together.

The stock market is starting to focus more on the global political landscape and the US election is likely to increase uncertainty for the time being.

Potential investments that have multi-year earnings visibility or entrenched business models during a weakening economy are likely to outperform in a market pullback.

 

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.