JP Morgan claims that the current rise in the US S&P 500 index is essentially similar to a dotcom bubble. Despite this, many people say that the dotcom bubble's unique "irrational excess charm" is different from the current situation. Quantitative strategists at JP Morgan said they found "a number of similarities" between the current rise in the US stock market and the dotcom bubble. In particular, he pointed out that the main concern for investors in 2024 should be the continued heightened concentration in the U.S. stock market.
They said it was worth paying attention to the top ten stocks in the MSCI US index. Among these are the "Magnificent Seven", which account for 29.3% of the total index, close to the historic high of 33.2% in June 2000. The top five stocks alone account for 21.7%, just below the highest since 1994 of 22.4%.
“Our analysis shows that although there are notable differences, they are infinitely similar!” said the strategists. This concentration is particularly linked to the overrepresentation of technology stocks, and the current situation is similar to the dotcom era. The top ten stocks in the MSCI U.S. Index currently include just four sectors, compared to the historical median of six.
“Current sector allocations are less diverse than they were at the beginning of the dotcom bubble, with only four sectors compared to six back then.” Unlike the dotcom era, the top stocks listed today have higher valuation attributes relative to the overall index, but overall, current valuations are less extreme than they were in the early 2000s.
Strategists pointed out that while it is true that current valuations are low, the risks associated with market concentration are somewhat different from the dotcom era than the current problems. However, extremely high valuations could indicate that concentration levels are approaching limits, and there could be a market correction as a natural rebalancing mechanism to normalize the market, it said. Given the recent significant market movements and extreme stock positions, strategists anticipate a potential market correction, which they believe could be triggered by the underperformance of the ten major stocks.
