The S&P 500 index closed at a record high of 5,321.41, driven by the top 10 holdings that represent about 32.5% of the index, triggering concerns of overconcentration risks. However, these top 10 stocks have been driving exceptional returns, with S&P 500’s annualized total return over the last five years at 16%, compared to its 30-year average of 10%. The S&P 500 index serves as a benchmark for the broader market, tracking 500 publicly traded large U.S. companies across all sectors and covering nearly 80% of available market capitalization.
The S&P 500 is different from other indices like the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite, in terms of how it is weighted and the companies it tracks. The S&P 500 is a float-adjusted market-capitalization weighted index, with specific criteria for stock inclusion, including being a U.S. company with a minimum market cap and minimum trading volume. The top 10 stocks of the S&P 500 have played a significant role in driving its recent strong performance, with a collective forward Price/Earnings multiple lower than that of the dotcom bubble peaks.
The Nasdaq Composite index, which closed at a new record high of 16,832.63, is seen as a barometer of the technology sector, with more than 50% of the index representing tech stocks. The top 10 holdings of the S&P 500 have reached the highest level of concentration in decades, stoking fears of overconcentration risks. However, historical data shows that peak concentration levels have often been followed by continued market rallies, although caution is advised based on past market cycles.
With 93% of S&P 500 companies reporting positive earnings growth for the first quarter of 2024, sectors like communication services and consumer discretionary are leading in earnings growth rates. Despite concerns about overconcentration risks, top S&P 500 stocks are well positioned to benefit from the AI boom, with significant potential for future growth. Investors are advised to conduct their own research and due diligence before making investment decisions, as past performance is not indicative of future outcomes.
Wall Street expects the S&P 500 to earn $245/share in 2024, while the top 10 stocks of the S&P 500 are estimated to generate a combined $150 in EPS for the current fiscal year. Morgan Stanley has raised its base case 12-month target price for the S&P 500 to 5,400, suggesting continued positive performance for the near future. While the overconcentration of the S&P 500 in top holdings raises concerns, strong financial performance and AI tailwinds may mitigate downside risks, pointing towards a positive outlook for investors.
