Amidst two distinct stock markets facing American investors, the S&P 500 surges to new heights driven by a single powerhouse, Nvidia. Meanwhile, smaller companies in the Russell 2000 index have underperformed and remain far below their peak. In contrast, the average stock within the S&P 500 is trading at roughly the same level as at the beginning of 2022 with more than half of the stocks falling since then. However, only 198 stocks managed to rise in the last month despite hitting new intraday highs on 11 out of 13 trading days.
The narrowness of this market is a concern for technical analysts who believe that a wider dispersion of performance among many stocks is essential for a sustainable bull market. This suggests that there are two key drivers behind stock performance: demand for chips used in artificial intelligence applications and concerns about the US economy and interest rates. The former fueled Nvidia’s rise to become briefly the most valuable company in the world, while weak data and ongoing inflation worries dragged down most other stocks.
Passive investors who invested in the S&P 500 are currently benefiting from an over-reliance on Nvidia and AI-related stocks. However, this concentration poses a risk if Nvidia’s performance falters or if there is no wide dispersion of gains across other stocks in the market. Recent events have also shown that smaller stocks in the S&P did not strengthen when bond yields fell as expected, indicating that a weaker economy with no anticipated interest rate cuts does not bode well for investors. Nevertheless, due to its volatility, it could easily reverse course from worrying about economic growth to believing it’s strong again based on mixed data received recently. Thus, investors should be cautious about investing in these markets given current uncertainties and diversify their portfolios accordingly.
