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S&P 500, Nasdaq Higher in Second Quarter; Jobs Report on Friday 

Overview: Stocks around the world were largely unchanged last week as markets rounded out a strong second quarter and first half of the year. For the quarter, the S&P 500 index and tech-heavy Nasdaq added 3.9% and 8.3%, respectively. As the enthusiasm for artificial intelligence and technology stocks continues, the Nasdaq notched its third positive quarter in a row for the first time since 2021. Investors have been encouraged by continuing disinflation as the core personal consumption expenditures (PCE Price Index) for May was reported at 2.6% year-over-year, below expectations. Falling inflation has supported market expectations the Federal Reserve can start cutting the funds rate in September. On the growth front, GDP growth for the first quarter was revised upward to 1.4% last week, in line with expectations. This week, with the market closed for the Fourth of July on Thursday, investors will focus on the jobs report on Friday for a read on the strength of the labor markets. Nonfarm payrolls are expected to increase by 189,000 in June, down from 272,000 in May, with the unemployment rate forecast to remain steady at 4.0%. 

The Evolution of Market Share for the S&P 500 (from JP Morgan): Railroads, plastic, cars, oil, landlines, internet. AI might be new, but innovations that spur secular investment cycles are not. Companies in these high-growth industries have long leveraged their first mover advantage to develop seemingly impenetrable moats, allowing some to dominate the S&P 500’s top-10 podium for decades. But entropy is inevitable. The S&P 500 market share of each year’s top-10 cohort evolves over the following five years. On average, the top-10’s share fell from 21% initially to 14% by Year 5 and 10% by Year 10. This downward trend held for every year from 1999 to 2015. Since 2016, however, not only have the cohorts gained share, but also the initial share of subsequent cohorts has been increasing. Currently, we’re sitting at a 50-year high with 36% of the S&P 500 concentrated in the 10 largest companies. These predominantly mega-cap tech names have rapidly gained additional share as the market crowned them AI’s biggest beneficiaries. While this could be true, paradigm shifts like the internet and AI make the future even more uncertain. Only one tech name from 2000s top-10 remains in the list today. Luckily, today’s tech sector is trading at a P/E of ~30x vs. a peak of ~70x in 2000. So, while investors can ease their bubble woes, a healthy dose of wariness about high concentration at elevated valuations is warranted.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC.

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