Top strategist at Morgan Stanley: Only a "bear market in US stocks" similar to 2022 can overturn the dominance of tech giants

According to the financial news app Zhitong Finance, David Kelly from JPMorgan Asset Management stated that tech giants such as NVIDIA (NVDA.US), Apple (AAPL.US), and Microsoft (MSFT.US) continue to have a significant impact on the rise and fall of the US stock market. He believes that only a "bear market impact" could disrupt the dominance of these tech giants in driving the US stock market, with "bear market impact" referring to a major market crash experienced by investors in 2022.

As one of the top Wall Street strategists, the chief global market strategist at the institution expects the earnings growth trend of the S&P 500 index and stock price gains to expand beyond the large tech giants by the end of the year. However, he believes that this may not be enough to narrow the significant performance gap between the "Magnificent 7" tech giants and other US benchmark stock indices.

Kelly mentioned that this implies that market sentiment needs to be severely impacted to prevent these large tech companies leading the US stock market rally from 2023 to 2024. The asset management department at JPMorgan manages approximately $3 trillion in assets. Kelly pointed out that an example of a severe impact was two years ago when the tech giants were heavily affected by the Federal Reserve's aggressive monetary tightening policy, with the "Magnificent 7" tech giants experiencing much larger declines than the broader US market represented by the S&P 500 index.

In an interview, Kelly stated: "When the next bear market arrives, I believe that the stocks with the highest gains will suffer the most severe blows, just like in 2022." "Market sentiment must be disrupted to disturb the current patterns of how people allocate funds."

In recent years, large tech giants have been dominating the US stock market from the top of global stock markets, but their control has never been as strong as it is now. Data compiled by institutions shows that an equally weighted version of the S&P 500 index, which treats all component stocks such as NVIDIA, Microsoft, and Macy's equally, has lagged behind the market-cap weighted S&P 500 index by about 10 percentage points this year, marking the largest first-half performance gap in statistical history.

It is worth noting that the market-cap weighted S&P 500 index, which is tracked by most ETFs in the market and is currently the most mainstream calculation method for the S&P 500 index, gives the "Magnificent 7" tech giants a weight of over 30%.

However, some forecasters are beginning to believe that the profit growth of large tech stocks is expected to generally slow down, while the profits of the rest of the S&P 500 index component companies will accelerate. Strategists from Morgan Stanley and Bank of America, among other institutions, have stated that this shift will help boost other sectors of the US stock market.

Kelly predicts that the narrowing gap between the profits of various sectors and tech giants is not enough to dampen people's enthusiasm for investing in artificial intelligence in the short term. Of course, considering that the valuations of large tech companies are already too high, he does recommend long-term investors to look for investment opportunities outside of large tech stocks.

The "Magnificent 7" includes: Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms. Global investors continue to flock to these seven tech giants in 2023 and the first half of 2024, mainly because they are betting on the fact that, due to the massive market size and financial strength of these tech giants, they are in the best position to leverage artificial intelligence technology to expand revenue.

Taking the S&P 500 Information Technology Index as an example - the information technology sector covers most tech companies, and the index had a P/E ratio as high as 31x in June, while the P/E ratio of the entire S&P 500 index was 21x. Data compiled by institutions shows that this gap is the largest gap since 2003.

"I think what's driving the market is this momentum psychology," Kelly said. "When investors generally have a specific investment theme, it seems that only a few core names in a few themes will attract cash - slow changes in profit distribution will not really trigger a trend change in the market or investor psychology."

Currently, there is little sign that the momentum supporting large tech giants will weaken. Investors are generally betting on a soft landing for the US economy, robust economic data, rate cuts by the Fed, and a slowdown in inflation. Kelly describes this as a "boring" backdrop and adds, "But a boring backdrop is very favorable for the market."