The main stocks on Wall Street are gaining more and more weight: is another bubble on the way?

By Julien Ponthus and Farah Elbahrawy/Bloomberg

The dominance of the 10 largest stocks in the US stock markets is increasingly similar to the dot-com bubbleincreasing the risk of a sell-off, according to quantitative strategists at JPMorgan Chase & Co. (JPM).

The share of the top ten stocks in the MSCI USA index, including all calls seven great tech stockshas increased to 29.3% at the end of December the strategists led by Khuram Chaudhry wrote.

This is slightly below the historical high of 33.2%, reached in June 2000. Also, just Four sectors are represented in the top ten stockscompared to the historical average of six, strategists said.

Although the similarities between the current environment and the speculative frenzy in Internet stocks at the end of the last century are often ignored, analysis by strategists shows that the circumstances ““They are much more similar than you might think.” they said.

“The key conclusion is that highly concentrated markets present a clear and present risk to equity markets in 2024,” they wrote. “Just as a very small number of stocks were responsible for the majority of the MSCI USA Index’s gains, corrections in the top ten stocks could drag stock markets lower“.

U.S. stocks soared as the economy held up better than expected, with growing bets on interest rate cuts pushing progress further into the final months of 2023.

Optimism about AI has also boosted tech stocks like Nvidia Corp (NVDA) and Microsoft Corp (MSFT), prompting a bubble warning.

The top ten stocks in the MSCI USA index have a higher valuation premium over the rest of the index compared to the dot-com bubble era, although valuations in the early 2000s were significantly higher than they are today, the strategists said

“The fact that valuations are lower in absolute terms suggests that concentration risks are not currently of the same order of magnitude as they were in the dot-com era,” Chaudhry’s team said. However, strategists warned him Extremely excessive valuations could be an indicator that concentration is approaching its limitswhich would require a rating reduction.

The likelihood of the broader index outperforming the top 10 stocks in the near future is increasingly likely, they said.

“Given the magnitude of the nature of the recent moves, as well as the extremes in the stock position, we expect corrections to materialize in the stock market, which could be driven by weakness in the top ten stocks,” the analysts said. .