Tech stocks' market concentration isn't necessarily a 'flaw'

Big tech companies like the "Magnificent Seven" have seen significant gains in the last year, increasing their weight on US Indexes (^GSPC, ^DJI, ^IXIC). Yahoo Finance Reporter Josh Schafer joins Catalysts to discuss whether the trend is a flaw or a feature of the current market.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

And video alone has been responsible for about a third of the market's rally so far this year.

The big question.

Is that a bug or is it a feature of this market joining us now to discuss?

We've got our very own Josh Shafer who reported on this for us.

Josh, I know you've been speaking with sources about all of the movement that we've been seeing in in video.

What are they telling you about how to read this moment?

Yeah, I mean, concentration is bad if you're a bear, and it's probably good if you're a bull, right is sort of the way.

I think you could simplify it down to that.

And most people are arguing right now that it's a feature of this market.

So BlackRock was out yesterday with the chart pointing out that the concentration that we've seen in Tech and the gains that we've seen in tech over the last year has really been a feature of this rally.

Not necessarily a bug.

You're looking at it here.

S and P. 500 tech is in purple.

Uh, the normal S and P 500 is in light blue, and then your yellow chart.

There is the S and P 500 X Tech.

So if you didn't have all those gains in tech, the market wouldn't be up nearly as high.

And I think sort of the take away from this chart for me is yes, you can worry about it all day long, right?

But at the end of the day, it's what's helping you.

If you're an index investor, sort of get these gains.

And it is part of the good part of the S and P 500 Ben Snyder at Goldman Sachs, who they've recently just upped their target to 50,600.

He called it the beauty of the S and P 500 right?

The fact that when large companies outperform, they can pull the index up for you.

And those companies have had strong earnings, too.

So I don't think there's a lot of people clamouring necessarily, that these big tech companies ones we're talking about right are rising for no reason.

The earnings are coming up significantly.

That's dragging the index up, and right now people feel relatively solid about that.

Yes, and there's also and you also have this in your piece, too, Just about some of the number crunching that Mike Wilson has done over Morgan Stanley, just in terms of when we do see narrow breath within the market, some of that future performance or gains that we have seen as a result over the next three or six months.

Yes, this is so.

The chief investment officer over Morgan Stanley, Mike Wilson, had an interesting point on this, he said Market.

Right now, he measured it based on how many companies in the top 500 are outperforming the index.

It's at about 20% over the last month on a rolling one month basis, which is the lowest we've seen since 1965 about 60 years.

So if you just look at that chart in a box, that's scary, right?

There's not that many stocks leading, but he points out, when we get below 35% so when we get in this narrow breath range, actually the returns for the next six months are about 4%.

And if we went up 4% from here, would anyone really complain?

Probably not, right.

So essentially saying that it doesn't necessarily mean that the rally just sort of falls off a cliff because we are in a narrow regime.

There are different ways that you can get higher, right?

And some strategists have argued that it might actually be the most beneficial scenario for the S and P 500.

Could be the narrow market rally continues.

Maybe it isn't that worrisome overall or making a hold to do out of nothing is we got to talk about something.

We do all right.

Thanks so much.