With the S&P 500 up 8% so far this year, your portfolio might be looking pretty good. But there are some serious risks lurking below the surface of the apparent stock rally.
Driving the news: Last week’s surprisingly strong earnings for big tech amid gloomy economic data underscored a growing gap between winners and losers in the main US stock index.
- 80% of the S&P 500’s gains this year have been driven by just seven companies, per the FT, including Apple (up 35% this year), Microsoft (up 28%), and Nvidia (up 93%)
- By contrast, the S&P 500 Equal Weight Index, which incorporates the movement of each stock in the index equally, is only up 2.7% this year.
Why it matters: The strong performance of a few stocks—caused in large part by bets on artificial intelligence and a belief that the Federal Reserve will cut interest rates in the near future—may be hiding a fragile stock market.
- Fundamental economic conditions appear to be weakening: US growth slowed significantly in the first quarter of the year, data released last week showed, with the housing market and business investment shrinking.
- If those economic conditions begin to weigh on big tech stocks, the impact on the market as a whole will be severe.
Bottom line: If investors sour on tech again, expect to see market indices like the S&P 500—and any funds you own that track them—turn sharply downward.