US stocks have been really strong this year? Wrong! Don't let the seven tech giants - FAAMGNT - blindfold you!
Note: After excluding technology stocks, the S&P 500 index has hardly risen this year, with nearly 40% of all individual stocks also experiencing a decline! What's even more concerning is that S&P 500 EPS may continue to decline YoY in the second quarter. Can the already high valuations and market sentiment still drive the U.S. stock market?
Looking back at the first half of the year, the US stock market rose amid multiple disturbances such as the expectation of interest rate hikes by the Federal Reserve, the Silicon Valley bank crisis, and the weak prospects of the US economic fundamentals. The S&P 500 index surged by 16%, and the Nasdaq index achieved its largest first-half gain in nearly forty years.
But does this mean that the US stock market is exceptionally strong this year? That's incorrect!
It should be noted that the main driving factor behind the rise in the US stock market this year is the rebound in risk appetite, with the technology sector making the largest contribution. Semiconductors, automobiles, software, and technology hardware have seen the highest increases.
However, the analysts at Haitong Securities, led by Xun Yugen, have noticed that excluding technology stocks, the S&P 500 index has hardly risen this year!
Although the S&P 500 has risen by as much as 17.5% this year, the overall increase in the remaining components of the S&P 500, after excluding all technology stocks (approximately 90 in total), is only 2.1%. This clearly indicates a significant differentiation between the technology industry and other industries in the US stock market this year.
If we compare all US stocks horizontally, we can even find that among the 6,209 companies listed in the US stock market, 39% of stocks have recorded a decline since the beginning of the year, while 61% have risen. Among them, only 29% of stocks have outperformed the S&P 500.
Looking at the overall performance of the US stock market, the simple arithmetic average of all stock gains is 10.4%, with a median of only 4.0%. This means that the comprehensive performance of the US stock market is significantly inferior to the broad-based index.
In short, the overall performance of the US stock market this year is not as strong as that of the broad-based index! The overall upward trend in the market is driven by a few technology stocks and leading stocks.
Specifically, the performance of the seven giants in the US stock market—NVIDIA, Meta, Tesla, Amazon, Apple, Microsoft, and Google—has been very strong this year, with the first three experiencing increases of 214.7%, 160.4%, and 125.6% respectively. Even Google, with the lowest increase, has achieved 40.7%. These companies collectively account for 30.8% of the total market capitalization of the S&P 500.
These high-weight technology stocks have contributed to most of the gains in the US stock market index. For example, a single stock like NVIDIA has contributed a 2.8 percentage point increase to the S&P 500 index this year, and the aforementioned seven technology giants have contributed a cumulative increase of 12.8 percentage points, accounting for 73.2% of the overall increase in the S&P 500.
What should we be cautious about now?
It should be noted that in the first quarter of this year, the earnings per share (EPS) of the S&P 500 still showed a year-on-year decline. And according to S&P's expectations, the second quarter may continue the trend of year-on-year negative growth, which means that the micro-profitability of US listed companies has not provided significant support to the stock market performance.
The already high valuations and the overheated market sentiment cannot continue to drive the rise of the US stock market indefinitely. Ultimately, it needs to return to the fundamentals. As the second quarter earnings season approaches, it is time to be alert to the downside risks of profitability.
