Martin Baccardax
U.S. stocks are back to flirting with their highest levels on record, but Wall Street isn't entirely convinced that the scoring spring rally will extend into the back half of the year, and megacap-tech performance could be a key reason why.
The S&P 500 finished just 0.4% lower across the whole of the Tuesday session, even as the index saw 454 of its 503 constituents trading in the red.
In fact, outside of the megacap-tech stocks, led by a 4% advance for Nvidia, only a handful of shares, including GE Aerospace and Citigroup, recorded meaningful index gains.
Data from Duality Research suggest it was the worst day for "market breadth" on the benchmark since 1996. And with fewer stocks participating in the muted summer rally, the prospect of extended gains could start to dim.
The S&P 500 equal-weight index, which treats each of its constituents evenly, is up around 4.2% for the year, compared with a 6.3% gain for the market-weighted benchmark.
The gap in performance over the past month, however, is widening as of late.
Since the market lows of early April, the equal-weight S&P 500 has gained 0.27% on average each trading day, compared with a gain of 0.21% for the S&P 500.
Over the past month, however, the equal-weight index has risen by a daily average of just 0.15%, compared with a 0.18% gain for the market-weighted index.
And with markets relying on fewer stocks -- such as the megacap tech names in particular -- to drive performance, the stakes for second-quarter earnings season are acutely elevated.
"If stocks are going to go meaningfully higher from here in the second half of 2025, earnings will be an important part of the story," Jeffrey Buchbinder, chief equity strategist, and Adam Turnquis, chief technical strategist at LPL Financial, wrote in a recent market update.
"Earnings growth in the first quarter for S&P 500 companies was solid at around 13%, with nearly half of that increase coming from the Mag 7," the pair added.
"Normally, investors would celebrate these numbers, but they were produced before most of the tariffs went into effect, which clouds the outlook," Buchbinder and Turnquis wrote.
LSEG data suggests collective second-quarter earnings for the S&P 500 are likely to rise 5.8% from last year to $528.3 billion. Nearly 30% of that total is expected to come from just two sectors: Information Technology and Communications Services.
The former category is dominated by artificial-intelligence giants Nvidia, Apple, Microsoft, Broadcom, and Oracle. Alphabet and Meta Platforms lead the latter.
The same two sectors will comprise around a third of all companies reporting third-quarter earnings, based on current LSEG forecasts.
Valuations of the so-called Magnificent Seven stocks may also reflect that reliance. The biggest stocks in the market are trading at 29.3 times their projected 12-month earnings, according to data from LPL Financial.
That is well ahead of the historically expensive multiple of 22.5 times level for the broader S&P 500.
Data from Torsten Sløk, chief economist at Apollo Global Management, is even more blunt.
"The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s," he said in a recent blog post.
John Higgins, chief economist at Capital Economics, expects that valuation disparity to continue, but it may not lead to a big market pullback.
"Today's one in AI is being inflated more by earnings than by valuations, " he said. "That is a key reason why we forecast further gains in the U.S. stock market by the end of next year, with the big-tech sectors leading the charge."
"If we're right, the S&P 500 is likely to get back on the straight and narrow, even if struggles to rise further in 2025," he added. "We forecast it will finish 2026 at 7000."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 16, 2025 14:31 ET (18:31 GMT)
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