Concerns Beneath the Feast of US Stocks: How Long Can the Giants Dance Alone?

Source: The New York Times

Compiled by: BitpushNews

The U.S. market is top-heavy, with Nvidia's weight surpassing that of any company in modern history. Our columnist believes that risks are everywhere.

The US stock market is a miracle. Despite the numerous destructive policies implemented by the Trump administration, it has still found a way to prosper.

Driven by the vision of advanced artificial intelligence (AI), technology stocks have soared. Nvidia, which produces a multitude of AI chips, crossed a new market threshold this summer. It became the first company to surpass a market capitalization of $4 trillion, currently accounting for about 8% of the total market capitalization of the S&P 500 index.

According to 35 years of data tracked by the Leuthold Group, an independent financial research company in Minneapolis, Nvidia currently holds a larger market share than any other company during this period.

Not only Nvidia, but according to FactSet, there are also nine other companies in the U.S. market with a market capitalization of at least $1 trillion. Broadly speaking, all of these companies, except Warren Buffett's Berkshire Hathaway, are tech stocks. Microsoft and Apple both have market capitalizations exceeding $3 trillion; Alphabet (Google) and Meta (Facebook) have market capitalizations over $2 trillion; next is another large chip manufacturer, Broadcom, and Tesla (yes, it's an automotive company, but it has tech attributes). Berkshire Hathaway ranks at the bottom of the list with a market capitalization of about $1 trillion.

Technology is king. I said this during the internet bubble in 1999, but it is even more true now: the concentration of today's stock market is much higher than ever before, showing a serious tilt towards rapidly growing tech stocks.

Investors with a heavy allocation in technology stocks in their portfolio—this now includes anyone holding the entire stock market through index funds—are making profits.

But when the stock market becomes so unbalanced, risks are everywhere.

Going to extremes

After a sharp decline in April due to the highest tariffs imposed by the Trump administration since the 1930s, the S&P 500 index has experienced an unexpectedly good time this year. The technology sector has been the main contributor to these gains.

According to data from Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, as of July, the information technology sector led by Nvidia, Microsoft, Broadcom, Palantir Technologies, and Oracle contributed nearly 54% of the S&P 500's total return of 8.6%. The communication services sector, which includes Meta, Netflix, and Amazon, contributed another 15.4% to the S&P 500's return. Together, these two technology sectors accounted for nearly 70% of the total return of the entire index.

If we examine individual stocks, the market appears more top-heavy. Nvidia is the giant among them, contributing 26.2% to the total return of the S&P 500. Here are four other stocks that contributed the most:

• Microsoft contributed 21.6% to the total return of the S&P 500 as of July.

• Meta contributed 9.8%.

• Broadcom contributed 8.3%.

• Palantir contributed 4.5%.

If there is any difference, it is that these statistics still underestimate Nvidia's role as a pillar of the market. In the race to build advanced generative artificial intelligence, the company is both a key player and a major beneficiary—this AI may one day surpass human intelligence in at least some aspects. An arms race has begun. Alphabet, Microsoft, Meta, and Amazon have announced plans to invest a total of $400 billion in capital expenditures this year, most of which will be used for AI infrastructure.

Utility stocks rose alongside technology companies as AI data centers require massive amounts of energy - a development that is not good for the environment or consumers' electricity bills, but is necessary if AI computing power is to continue to grow.

Currently, the vast majority of AI spending is directed towards Nvidia. According to FactSet data, the company's profits are extremely robust and growing rapidly, providing investors with astounding returns – an annualized return of over 70% over the past five years, including dividends. Year-to-date, Nvidia's stock has returned about 30%. The company will announce its earnings report on Wednesday, and performance is expected to be very impressive.

However, if the company fails to meet investors' expectations, caution is required. The AI stock market ecosystem that currently dominates the entire stock market will immediately experience turbulence.

From certain metrics, Nvidia's ability to continuously generate growing profits is even more important for the entire stock market than whether the Federal Reserve will lower interest rates at its next meeting. This speaks volumes: after all, the Federal Reserve's influence is enormous.

Extreme valuations are permeating other parts of the market. Take Palantir as an example. It provides consulting services to the U.S. military and numerous large companies using advanced technology—and helped the Trump administration collect and organize personal information on millions of Americans. According to FactSet, all of this has made Palantir the best-performing stock in the S&P 500 index this year, with an increase of over 100%.

Traders have pushed its stock price to an extraordinary level. According to FactSet data, Palantir's price-to-earnings ratio, a standard valuation metric that compares stock price to company profits, exceeds 570 times, which is about 20 times the average level of S&P 500 constituents.

A recent article in The Economist claims, "Palantir may be the highest-valued company in history." I wouldn't say it so definitively. After all, Palantir has substantial earnings (its CEO Alex Karp is doing quite well too, as he topped the latest salary ranking of executives at publicly traded companies in the New York Times).

Comparison of Past and Present

Many tech companies that were hot during the Internet bubble never turned a profit.

What comes to my mind is Pets.com, which became famous in 1999 and 2000 for its humorous "Sock Puppet" (a toy dog that appeared on television). When the company dramatically went bankrupt, it became infamous—symbolizing excessive speculation. When it filed for bankruptcy in 2000, many investors lost everything.

Comparing companies that lost money during the dot-com bubble era with those that are currently profitable but highly valued in today's market is not very meaningful. The situation is different now.

But in terms of market concentration, the current situation is more concerning. In 1999, Microsoft was the largest company in the market, but its weight in the S&P 500 index was relatively moderate, at only 4.9%. According to Mr. Silberblatt's data, that year Microsoft contributed only 11.9% to the index's total return.

The following are the contributions of other top stocks from that year to the 21% annual return of the S&P 500 index:

• Cisco Systems, contributing 10%.

• General Electric, contributing 8.4%.

• Walmart, contributing 6.1%.

• Oracle Bone Script, contributing 5.7%.

Together, the top five companies contributed 42.1% to the annual return of the S&P 500 – a significant number, but compared to today's contribution rate of over 70% from the top five companies in the S&P 500, it's just a small drop in the bucket.

If these critical companies—or the economy under Trump—encounter problems, the market may not have much of a foundation to rely on. Therefore, global diversification is necessary, holding both stocks and bonds, and being prepared for potential reversals in this incredible market.