Quick Overview
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Craig Johnson, Chief Market Technician at Piper Sandler, recently pointed out on CNBC that the concentration of technology stocks has reached its highest point since the dot-com bubble. Major players include NVIDIA (NVDA), Apple (AAPL), and Microsoft (MSFT). Currently, the Information Technology sector accounts for 32.91% of the index, with NVIDIA at 7.58%, Apple at 6.66%, and Microsoft at 4.91%.
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Johnson expressed optimism about the economic benefits of AI, predicting that they will soon extend to various sectors, particularly industrials, which have already shown significant gains.
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During his appearance on CNBC’s Morning Call Sheet, Johnson raised flags for self-directed investors involved in the AI market. He highlighted Piper Sandler’s report, The Bull Market That Few Trust, stating, “The technology sector comprises 41% of US investable assets, with semiconductors accounting for 50% of that. Such levels haven’t been seen since the Y2K era, presenting a risk that investors need to monitor.”
Significance of the Y2K Comparison
The last time technology’s weight in US investable assets reached comparable levels, it was followed by a prolonged decline in the tech and semiconductor sectors.
The current concentration is primarily driven by a few key players. NVIDIA has a market cap of approximately $5.3 trillion, showing a trailing P/E ratio near 45 and a forward P/E of around 27, and has risen 79.54% over the past year. Meanwhile, Apple is valued at $4.3 trillion, and Microsoft stands at $3 trillion. Together, these three companies account for over $12 trillion in market capitalization.
Macro Factors Impacting Valuations
Johnson discussed the concentration alongside two macroeconomic indicators. The CRB commodity index is reaching multi-year highs, and bond yields are not declining, undermining expectations for rate cuts. Currently, the 10-year Treasury yield is at 4.42%, placing it at the 86.7th percentile of its 12-month range. Additionally, WTI crude oil has surged from around $65 per barrel to $109.76, contributing to higher discount rates and persistent inflation that compress revenue multiples, putting pressure on tech sector dominance.
Where AI’s Advantages Might Expand
Johnson maintains a positive outlook on AI, believing it will become an influential technology. He envisions that its benefits will eventually spread to sectors such as industrials and financials, while he argues that the rapid growth of AI capital expenditures in tech may not be sustainable. The performance disparity is already notable, with the Industrial Select Sector SPDR rising by 25.93% over the past year, compared to only a 2.95% increase in the Financial Select Sector SPDR and a 54.76% increase in the Technology SPDR.
For an in-depth analysis, Piper Sandler’s research portal serves as the main source. Johnson’s key takeaway is to keep an eye on sector concentration, observe the gradual spread of AI benefits, and recognize that the overall economic backdrop does not favor further expansion of valuations for the current leading companies.
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