JPMorgan quant strategists have identified “a plethora of similarities” between the current rally in US stocks and the dot-com bubble, despite common dismissals of such parallels due to the distinct "irrational exuberance" of the latter period.
For the team, a key investor concern in 2024 should be the heightened and persistent concentration in the US equity markets.
They remind investors that the top ten stocks on the MSCI USA Index, which includes the "Magnificent Seven," now make up 29.3% of the index, close to the historical peak of 33.2% seen in June 2000.
The top five stocks alone account for 21.7%, just shy of the post-1994 high of 22.4%.
“Our analysis shows that while there are notable differences, they are far more similar than one may think!” the strategists wrote in a note.
This concentration echoes the dot-com era, particularly in the overrepresentation of technology stocks. Currently, only four sectors are represented in the top ten stocks of the MSCI USA, against a historical median of six sectors.
“Current sector allocation is even less diverse than at the height of the Dotcom bubble, with only four GICS sectors represented now compared to the six back then.”
While these top stocks command a higher valuation premium compared to the rest of the index than during the dot-com bubble, overall valuations now are less extreme than in the early 2000s.
The strategists note that although current valuations are lower, the risk associated with market concentration isn't as critical as in the dot-com era. However, extremely high valuations could indicate that concentration levels are nearing their limits, and a market correction could serve as a natural rebalancing mechanism.
The likelihood of the broader index outperforming the top ten stocks is increasing, and given the recent significant market moves and extreme equity positioning, the strategists anticipate potential market pullbacks, likely triggered by weaknesses in the top 10 stocks.