Big tech is powering the stock market higher. Again.
The largest tech stocks, which dominated the stock market last year, have once again rallied. The group has pulled the S&P 500 back to record highs for the first time in two years. Investors are once again pouring money into tech shares in a bid to keep pace.
Leading the charge are the so-called Magnificent Seven tech stocks that helped propel markets last year. The group—Google parent AlphabetGOOGL 0.72%increase; green up pointing triangle, Amazon.comAMZN 0.80%increase; green up pointing triangle, AppleAAPL 0.67%increase; green up pointing triangle, Meta PlatformsMETA 0.90%increase; green up pointing triangle, MicrosoftMSFT 0.60%increase; green up pointing triangle, NvidiaNVDA 0.37%increase; green up pointing triangle and TeslaTSLA 0.16%increase; green up pointing triangle—has returned 4.4% so far this month, outperforming the S&P 500 by more than 2 percentage points as the industry prepares to report another round of earnings.
Investors are chasing the strong returns. They poured about $4 billion into tech funds over the two weeks that ended Jan. 17, the largest two-week inflow since August, Bank of America strategists said in a recent note, citing data from EPFR.
Last year, the Magnificent Seven member stocks more than doubled, adding a combined $5.1 trillion in market value, according to Dow Jones Market Data.
The group’s sheer size means their fortunes play a key role in the direction of the overall market. The seven companies accounted for 28% of the market cap-weighted S&P 500 as of year-end, according to S&P Dow Jones Indices. As a result, larger stocks are beating smaller ones. The equal-weight version of the S&P 500 index has trailed the benchmark by 2.7 percentage points through Tuesday.
A belief that Federal Reserve policymakers have successfully slowed inflation without inducing a sharp economic slowdown has helped fuel the trade. The economy has cooled gradually, a trend that Wall Street expects to continue. A belief that the Fed would cut interest rates aggressively this year sparked a rally across all asset classes to end last year.
But investors have lately dialed back expectations for interest-rate cuts, which has led some portfolio managers to turn back to tech. “It’s a flight to quality where people have confidence in the fundamentals,” said Jim Golan, co-manager of the large-cap growth fund at William Blair.
The largest tech companies generate outsize profits and carry little debt on their balance sheets, making them attractive to investors when the economic outlook is cloudy.
What’s more, the enthusiasm surrounding artificial intelligence has received a fresh boost. Taiwan Semiconductor Manufacturing Co., a supplier for major semiconductor companies including Nvidia, said last week it expects revenue to grow 20% this year.
That topped Wall Street expectations, and investors said the forecast is evidence that demand is still strong for chips needed to power artificial-intelligence programs. “That’s kind of an indicator of where the puck’s going, that investment’s still going to be there,” said Tom Hancock, portfolio manager of the GMO U.S. Quality ETF.
The group’s biggest laggard is Tesla. The automaker, which is down 16% so far in January, is scheduled to report earnings Wednesday afternoon. Other Magnificent Seven companies will report results over the next several weeks.
The Magnificent Seven was an especially popular trade before the year began. Some investors consider such crowding a sign of limited futures upside. “The concentration risk people are starting to take again is very interesting,” said Max Wasserman, co-founder and senior portfolio manager at Miramar Capital.
While the group is pacing the market, the shares fared far better last January. They returned an average of 20% in that month, according to Dow Jones Market Data.
Wall Street analysts overwhelmingly recommend the stocks but expect a slower pace of gains. They project an average return of 8.6% for the group over the next 12 months, according to analyst estimates compiled by FactSet.
Some investors see the relatively muted forecasts as a sign that the trade is losing steam. “We just tend to think the rally has pulled forward a lot of returns,” said Wasserman.
Others said that tech shares have years of upside still ahead, if AI lives up to its hype. “People should be excited, because when you look out two, three, four years, [it] has the potential to really transform things,” said William Blair’s Golan.