Current S&P 500 rally is ‘far more similar’ to dotcom bubble than people think – JPM
JPMorgan quant strategists have identified “a plethora of similarities” between the current rally in US stocks and the dot-com bubble, despite common dismissals of such parallels due to the distinct “irrational exuberance” of the latter period.
For the team, a key investor concern in 2024 should be the heightened and persistent concentration in the US equity markets.
They remind investors that the top ten stocks on the MSCI USA Index, which includes the “Magnificent Seven,” now make up 29.3% of the index, close to the historical peak of 33.2% seen in June 2000.
The top five stocks alone account for 21.7%, just shy of the post-1994 high of 22.4%.
“Our analysis shows that while there are notable differences, they are far more similar than one may think!” the strategists wrote in a note.
This concentration echoes the dot-com era, particularly in the overrepresentation of technology stocks. Currently, only four sectors are represented in the top ten stocks of the MSCI USA, against a historical median of six sectors.
“Current sector allocation is even less diverse than at the height of the Dotcom bubble, with only four GICS sectors represented now compared to the six back then.”
While these top stocks command a higher valuation premium compared to the rest of the index than during the dot-com bubble, overall valuations now are less extreme than in the early 2000s.
The strategists note that although current valuations are lower, the risk associated with market concentration isn’t as critical as in the dot-com era. However, extremely high valuations could indicate that concentration levels are nearing their limits, and a market correction could serve as a natural rebalancing mechanism.
The S&P 500 has been on a rally in 2024, though it hit a recent snag at the end of April [3]. Here’s a breakdown of the rally so far:
- Overall increase: As of May 14, 2024, the S&P 500 is up about 10% for the year [3].
- Earlier momentum: The rally was particularly strong earlier in the year, with the index climbing over 2% in a single week at one point [3].
- Recent pause: After this strong run, the market has seen some consolidation and pullback since April [2, 3].
Expert opinions on the future of the rally differ:
- UBS is optimistic: They believe the S&P 500 could reach 5,500 by the end of the year, citing factors like disinflation and continued earnings growth [1].
- Focus on earnings: Analysts see broader earnings growth across the S&P 500 companies as a key driver for the rest of the year [2].
Overall, the S&P 500 rally in 2024 has been positive, but there’s some uncertainty about its continuation. It’s important to stay informed about market news and economic factors that could influence the stock market.