The strength of the US stock market lies only in these "Seven Sisters".

Behind the surge of the US stock market, which is defying the "hawkish" tone of the Federal Reserve, lies the prosperity of tech giants and the decline of other stocks.

Boosted by AI, the S&P 500 index has risen by more than 14% this year, poised to deliver one of its best performances in nearly two decades, but this is also the highest level of dominance by tech stocks.

The seven largest components - Apple, Microsoft, Alphabet-C parent company Alphabet, Amazon, Nvidia, Tesla, and Meta - have risen between 40% and 180% this year, while the overall performance of the other 493 companies has been lackluster.

At the same time, the market capitalization of these seven companies has accounted for nearly a quarter of the entire S&P 500 market capitalization. Apple's market capitalization has reached $2.9 trillion, surpassing the total market capitalization of the top 100 listed companies in the UK.

Nvidia, the "hottest" stock in the US stock market this year, has added $640 billion in market capitalization, equivalent to the sum of the market capitalization of the two largest banks in the United States, JPMorgan Chase and Bank of America.

This "top-heavy" phenomenon is not uncommon. Frédéric Leroux, head of cross-asset teams at Carmignac in Paris, said:

The large tech stocks in the S&P 500 are now in the same position as the oil companies in the past or the Nifty 50 index in the 1960s.

The "Nifty 50 index" was a group of 50 large-cap stocks that were highly sought after in the US stock market in the 1960s and 1970s. These stocks suffered a serious decline after being hyped. Therefore, Leroux also warned:

This is a problem, but it is a recurring problem.

Extreme

This escalating phenomenon has made analysts and investors uneasy.

Some believe that the US stock market has reached an astonishing extreme, where the lackluster performance of most stocks is being overshadowed, which is unsustainable and a sign of a dangerous future market environment.

Mike Wilson, chief US stock strategist at Morgan Stanley and one of Wall Street's biggest bearish analysts, warned that the victory of "a few giant stocks" is masking the broader pain in the market: Major repricing has occurred... dominated by low-quality, cyclical, and small-cap stocks.

Alex Cabrol, Managing Director of Tobam, a French asset management company, said that similar situations had led to severe recessions in the past:

This makes no sense.

The collapse of this phenomenon is not a matter of "whether," but "when."

On the other hand, excessive concentration makes stock selection quite difficult for diversified mutual funds.

Last month, Goldman Sachs analyzed over 500 mutual funds with a total asset value of $2.6 billion and found that the "extreme concentration" of the Russell 1000 Growth Index conflicted with rules requiring funds to maintain diversified investment portfolios or limit investments in individual companies. These rules mean that US mutual funds hold smaller positions in seven stocks, including Apple, Microsoft, and NVIDIA, than their index positions.

Relative to the index, fund performance is therefore affected. The outperformance of giant tech stocks is a huge headwind for core and growth mutual funds.

Chasing the Trend

Despite such high concentration and increasingly visible danger signals, some investors are still "surrendering" to tech stocks.

Max Kettner, Chief Multi-Asset Strategist at HSBC, wrote in a client note:

The breadth of the US stock market is the worst in history, but this does not in itself negate strong, reliable trading signals. Marginally, it may even be positive.

If there is any difference, it is that the direct performance after the weakening of the breadth of the stock market is better than that after the strengthening of the breadth of the stock market.

Barclays analysts said they had seen preliminary signs that investors were starting to give up their worries:

After a three-month period of watching, cautious but also cash-rich investors seem to have finally started chasing the trend.

The bank said that buying was spreading, not just in tech stocks, and this "could actually be a prelude to a sustained breakthrough in recent trading ranges."