Big Tech Soars, But Can Other Sectors Keep Up to Fuel Market Rally?

Since the start of the most recent stock market rise in October 2022, investors have taken it for granted that Big Tech will continue to expand.

However, if share prices are to continue rising, additional areas of the market will probably be required given the unimpressive profits estimate for the remainder of 2024. More engagement would be required if the market is to yield a comparable return in the second half.

That is a possibility. Industries like commodities and health care are predicted to enjoy about 25% profit growth by the fourth quarter after reporting 20% or more contractions in the first quarter. In contrast, Big Tech's profit growth is projected to decrease substantially from here on out.

Cyclical Sectors Poised for Growth Amid Shifts in Investor Focus

The oil, materials, consumer discretionary, industrial, and financial sectors are starting to look fairly fascinating. In the second half of the year, every one of those cyclical sectors will do better.

It seems like the cycle has already started. During the week ending May 31, customers at BofA withdrew about $2.2 billion from tech equities, the second-highest amount the bank has seen since 2008. The consumer discretionary industry, which is up 1.9% this year and has the second-worst performance in the S&P 500, had the largest inflows of new customers.

This is not to suggest that investors should or will abandon big tech. The S&P 500 has gained 12% this year, with most of the gain coming from its five largest stocks: Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., and Amazon.com Inc. These companies are leading the way in the artificial intelligence boom.

These five businesses have increased their market value by $2.9 trillion by 2024. As a result, information technology now has a 31% weighting, making it the largest sector in the S&P 500. Healthcare and finance are in second and third, respectively, at 12%.

Furthermore, technological businesses are still expanding. Simply put, their rate of profit growth is decreasing. Based on statistics provided by BI, the S&P 500's five largest businesses are likely to have their profit growth drop to 29% in the second quarter after three straight quarters of growth of over 44%. In the second half of the year, the rate is expected to settle into the teens.

The businesses are feeling the effects of their prior success in many respects since comparing their impressive 2023 performance to 2024 is difficult. However, even after significant expense reductions, the companies still make strong margins and grow profits.

Tech Investors Face Challenges Amid High Valuations and Diverging Profit Outlooks

Tech investors have a problem in part because equities are already highly valued. Compared to the S&P 500, which is priced at 21 times predicted earnings over the next 12 months, Nvidia is priced at 40 times. Apple is priced at 29 times, and Microsoft is priced at 33 times. Over the last ten years, even Alphabet, which is comparatively more expensive at 21 times, has been trading above average.

Furthermore, when the businesses' profit outlooks differ, there is a developing imbalance in the orientations of Big Tech stocks.

Nvidia has surged ahead of the competition, rising 144% this year and being the top performer in the S&P 500, as investors' attention has shifted to artificial intelligence. Amazon has gained 21%, Google parent Alphabet has increased by 25%, while Facebook parent Meta Platforms has increased by 39%. Microsoft, however, has only managed a measly 13% increase, showing that it hasn't truly kept up. And then there's the beleaguered Apple, which has only increased by 2.3% in 2024 after losing money for the bulk of the year.

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