The awkward truth behind the rise of US stocks: Apart from the seven giants, the other 493 stocks are "in deep trouble"

Behind the apparent prosperity of the U.S. stock market lies an awkward structural divergence: the rise of the S&P 500 index is almost entirely dependent on seven major tech giants, while the remaining 493 constituent stocks are lagging far behind. However, Wall Street strategists believe that as long as the earnings growth momentum of large tech companies remains strong, there is no reason to oppose this trend.

On November 4th, it was reported that data compiled by Bloomberg indicated that the "Seven Giants" (Apple, NVIDIA, Microsoft, Amazon, Tesla, Meta, Alphabet) are expected to achieve a 27% earnings growth rate in the third quarter, nearly double the previous expectations, becoming a key force supporting the market. In contrast, excluding these seven companies, the profit growth of S&P 500 constituents plummeted from 13% to 8.8%.

At the same time, according to Jefferies data, the S&P 500 equal-weight index—an indicator reflecting the performance of ordinary stocks in the benchmark index—has seen its discount relative to the S&P 500 index exceed 25%. However, Wall Street strategists generally believe that as long as the earnings machine of large tech companies continues to operate, there is no reason to oppose this trend.

The report pointed out that although market concentration has raised concerns about a bubble, investors' optimism about artificial intelligence technology and the continued strong earnings performance of tech giants have led most Wall Street professionals to continue betting on a few winners rather than waiting for market breadth to improve.

Earnings Performance of the Seven Giants Supports the Overall Market

The strong earnings reports of the "Seven Giants" tech stocks have become a key support for the current concentrated rise in the market. Recent earnings reports from companies like Apple and Amazon have further strengthened investors' confidence in this group.

Sameer Samana, head of global equity and real assets at Wells Fargo Investment Institute, stated:

"Given that it is difficult to see any factors that would reverse the upward trend in fundamentals, I cannot say that we are concerned about the lack of breadth behind the rise."

Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, believes that the current landscape dominated by large tech stocks may have "rewritten the investment manual and changed the central bank framework."

Although she suggests achieving "maximum diversification" in portfolios, she still prefers stocks of the seven giants and AI beneficiaries in U.S. stock allocations.

Is Market Concentration Reaching Dangerous Levels?

The performance gap between the S&P 500 equal-weight index and the market-cap weighted index has reached a concerning level.

According to Jefferies data, this level of discount is similar to the situation before the tech bubble burst in the late 1990s, when the gap between the two indices reached 30%.

Andrew Greenebaum, senior vice president of equity research product management at Jefferies, stated:

"It is important to clarify that we are not suggesting this is a bubble, but we are indeed puzzled by the lack of favor for the remaining 493 stocks. The market breadth remains perplexingly narrow, with no clear signs of an end in sight."

Chris Verrone, head of market technicals and strategy at Strategas Asset Management, believes that comparing this to the bursting of the internet bubble is "at best premature, and at worst misleading."**

He pointed out that despite the significant performance gap between the weighted index and the equal-weighted index, the equal-weighted index actually fell during the major index rises at the end of the 1990s—whereas the current equal-weighted index, although lagging, has still risen about 7% this year.

According to the trading department of JP Morgan, although clients are increasingly anxious about market narrowness, the likelihood of a significant drop at the index level is low as long as the major U.S. tech giants maintain strong momentum.

It is noteworthy that traders are also facing an unusual situation: the federal government shutdown has led to a scarcity of economic data, making it difficult to materially change perceptions of the economic situation. This places the entire burden of maintaining the upward trend on large tech stocks.

Wells Fargo's Samana stated, "Unless there is something that truly disrupts the fundamentals or macro narrative, we believe that at most only a normal pullback will occur." If a pullback happens, it may "be brief and shallow, as most people are still looking for buying opportunities on dips."