A top-heavy stock market doesn't mean there's a bubble

Nvidia and Microsoft make up a huge share of the S&P 500 but there is a historical precedent

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The May jobs report is due this morning.

Markets and the Fed will be looking for more confirmation that an economic slowdown is indeed underway.

Bank of America analysts expect nonfarm payrolls to rise by 200,000 — higher than the 175,000 increase in April but lower than the average monthly gain of 242,000.

They also expect the unemployment rate to tick down to 3.8%.

Look for stocks to climb today if the data show more evidence of a cooling labor market.

Is there an equity bubble?

The stock market has had a banner year so far. 

But a sizable share of its gains have come from a select few household tech names, which gives some market watchers pause.

Companies like Nvidia, Microsoft, Apple, Alphabet, and Meta operate with massive war chests, which makes them unusually resilient against rising bond yields and the uncertainty surrounding Fed policy

Mega-cap stocks, in turn, have done just fine in the face of higher-for-longer interest rates, especially with the tailwind of AI enthusiasm. 

To that point, Wednesday marked the first time ever that three stocks closed with a market capitalization above $3 trillion.

Those companies — Nvidia, Apple and Microsoft — are together worth the combined value of the smallest 350 stocks in the S&P 500, according to Bespoke.

While the performance has been top-heavy, it’s pulled the value of the benchmark indexes higher and skewed the market.

Buying into an S&P 500 index fund today means 20% of your portfolio is tied to three outsized tech companies. 

Still, sky-high valuations don’t necessarily mean stretched valuations or — gulp — a bubble.

At the most basic level, stock prices reflect how much value investors think the company will create in the future.

So a titan like Nvidia, for instance, seems to be positioned to create enormous value in the coming years, which suggests its meteoric rise in share prices may be justified. 

“The relative market capitalizations of the stocks of these companies is not without a fundamental foundation,” wrote Morgan Stanley’s Michael Mauboussin in a note this week.

Plus, as Mauboussin told clients, a top-heavy market isn’t all that unusual historically, especially if the biggest stocks generate the most money for shareholders.

Outliers like Nvida, Microsoft and Apple are among the greatest wealth generators of the last century — and for now, investors expect that to continue.

The current concentration may seem high relative to the last decade, but big picture, it’s not obviously an oddity.

Mauboussin again:

“In the 10 years through 2023, a period when concentration rose sharply, the top 10 stocks averaged 19% of the market capitalization while the companies averaged 47% of the economic profit. From 1990 to 2023, the top 10 were 17% of the market capitalization and 46% of the economic profit.”

Are you concerned about overvalued stocks or the potential for a bubble? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Thursday 10:30 p.m. ET


  • GameStop trading was halted on Thursday. After Roaring Kitty scheduled a livestream on his YouTube channel for Friday at noon, the stock soared more than 47% and continued climbing more than 30% after hours. If GameStop shares open at $70, Roaring Kitty will be a billionaire. (CNBC)

  • Nvidia is set for a 10-to-1 stock split today. Market data shows investors have ramped up short-term bets on the stock. Nineteen of the 20 most actively traded options tied to Nvidia that traded Wednesday are set to expire on Friday. (WSJ)

  • The European Central Bank cut interest rates for the first time in 5 years. On Thursday, officials warned that inflation will have to come down further for additional reductions. It’s likely that this marks the start of a “dialing back” of rates, ECB president Christine Lagarde said. (FT)


  • The US opened antitrust inquiries into Nvidia, Microsoft, and OpenAI (NYT)

  • Actively-run ETFs are set for a record $260 billion inflow this year (Bloomberg)

  • JPMorgan shared 3 catalysts that could spark a stock sell-off this summer (Business Insider)

  • Lawyers say it’s unlikely the SEC has a real case against meme-stock trader Roaring Kitty (WSJ)

  • Moody’s may slash ratings for a handful of US banks for their commercial real estate exposure (Bloomberg)

  • Robinhood doubles down on crypto as it acquires crypto exchange Bitstamp for $200 million (FT)

Last thing:

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