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Narrow Earnings Boost Wall Street’s Solid First Half
And now there are five, with the so-called Magnificent Seven having dropped some friends on the way to taking Wall Street to a gain of another 14% in the six months to June 28th.
Friday saw the Dow fall 45.20 points, or 0.12%, to 39,118.86; the S&P 500 fell 22.39 points, or 0.41%, to 5,460.48; and the Nasdaq lost 126.08 points, or 0.71%, to 17,732.60. For the quarter, the S&P 500 gained 3.9%, the Nasdaq rose 8.3% and the Dow fell 1.7%. In June, the Dow rose just over 1%, the S&P 500 added nearly 3.5%, and the Nasdaq rose 6%.
For the half year, the S&P 500 rose almost 14.5%, the Nasdaq jumped 18.1% and the Dow rose almost 3.8%.
The solid rally came as investors expressed growing concern about the narrowness of a rally in which just five stocks drove most of the gains.
Nearly 60% of the S&P 500’s year-to-date gain has been driven by just five “megacap” companies – Nvidia, Microsoft, Amazon, Meta and Apple. All were driven by an investor frenzy over the potential of generative artificial intelligence. Nvidia alone was responsible for 31% of the market’s growth in the first half of the year.
Nvidia shares rose 156% in the first half of the year, but just 7.6% in June — a not very convincing end to the quarter and half — and just 0.18% last week, which was a far cry from the gains double-digit weekly and daily rates.
Perhaps this reflected growing signs of a “weakness that has been developing beneath the surface of the market,” according to Kevin Gordon, senior investment strategist at Charles Schwab.
“It’s not uncommon throughout history to see the largest members post big gains in the indexes, but when the rest of the market is struggling, that’s when warning signs emerge,” he said on Friday.
Alphabet, up 31%, and Meta, up 45% in the half, didn’t quite make the Mega Five. Netflix fared better than most, up 44% after conclusively showing it had won the streaming wars, but its $288 billion market cap makes it a mere guinea pig compared to the MegaCaps.
Tesla was the fallen angel with a 20% drop in the half year, though a 12% gain in June made the loss seem less embarrassing for Elon Musk. But Tesla will be tested again this week with new global production and sales data due to be released.
And even though Donald Trump easily defeated Joe Biden in Thursday’s first presidential debate, that didn’t help Trump Media shares, which lost nearly 11% in value on Friday. That trimmed the week’s gain to 18.4%, but it’s still down 47% over the past three months.
But despite all the noise and attention-seeking from Trump and the looming November elections, investors are extremely fascinated by AI in every form that analysts, bettors, technology experts and anyone else can imagine.
“AI has sucked all the oxygen out of the room,” Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, told the Financial Times. “She has so much exposure that she kind of left other areas behind. I think there are a lot of companies in areas like industry and finance where business is doing really well, but they have been forgotten,” he added.
He and some other analysts hope the impending second-quarter reporting season will draw attention back to other non-AI areas of the S&P 500.
“This is the most concentrated market in at least 20 years,” Denise Chisholm, head of quantitative market strategy at Fidelity, also told the FT. Chisholm said most investors, swayed by comparisons to the dot-com bubble, assumed the current high level of concentration was inherently unstable. However, she argued that there had been several previous periods when “the market was very concentrated for a long time. I’m not saying that has to be a good thing,” she added. “But it’s hard to come out as an investor with a data-driven approach and say ‘it’s definitely bad and I’m sure and I would bet my portfolio on it’.”
But the next quarter will again be driven by dates for major reporting companies like Netflix, Apple, Amazon, Meta, Microsoft, perhaps Alphabet (all in late July or early August), and Nvidia’s Q2 report in 14 or August 21st (not yet confirmed).