Sceptics were concerned expectations were too high coming into Nvidia’s earnings report last week, given the stock had doubled in 2023 and was trading on 29 times sales.
That sounds bubbly but Nvidia delivered what Wedbush analysts described as “guidance for the ages”. The stock soared 25 per cent, driving it towards a near $1 trillion valuation.
Nvidia may well continue to justify its rich valuation but the increasing dominance of mega-cap stocks is concerning, says Morgan Stanley’s Lisa Shalett. She notes Apple alone is worth more than the UK stock market and is twice the size of Germany’s. The top 10 US companies now account for 35 per cent of the S&P 500, compared with 25 per cent during the 1999-2000 dotcom bubble and an average of 20 per cent over the last 35 years.
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Investing in the S&P 500 market is “increasingly a wager on the health of just a few companies”, with the fundamentals of the other 490 stocks carrying less weight.
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With an average price-earnings ratio of 28, the top 10 stocks look expensive. Shalett warns the risk of over-concentration is further exacerbated by the fact that after 15 years of outperformance, US stocks now account for 60 per cent of the global equity market.
The implication is investors should overweigh cheaper and more diversified non-US markets. Tech-focused investors may disagree but some wariness is understandable about a market increasingly reliant on mega-cap tech stocks like Nvidia.
