Why are fears of a market bubble exaggerated?

The ongoing market rally has pushed the S&P 500 up nearly 25% from its October lows, driven by gains in only a few stocks.

AI favorite Nvidia (NVDA) is leading the charge. The chipmaker has gained more than 80% since the beginning of the year, helping push the S&P 500 (^GSPC) and Nasdaq (^IXIC) to record highs.

The concentrated outperformance has led some on Wall Street to warn that the rally has gone too far and to declare stocks in bubble territory.

Market concentration has risen to its highest level in several decades. The 10 largest U.S. stocks now account for 33% of the S&P 500's market value and 25% of the S&P 500's earnings, according to Goldman Sachs data.

But concerns about narrow and superficial market participation may be misguided. Several senior Wall Street strategists explained on Yahoo Finance's “Morning Brief” last week that there is reason to believe the market will continue to rise.

“This may be the best selling trick right now… I don't think it's justified,” Drew Beatty, director of US equity strategy at Citi, said of the bubble fear on Yahoo Finance Live. “It's actually a lot healthier than people give it credit for.”

Strong quarterly results from major technology companies reinforced the bullish case. Nvidia posted another surprising quarter thanks to surging demand for AI, while Meta (META), Microsoft (MSFT), and Amazon (AMZN) all beat expectations.

Higher profit margins and proven returns are two reasons why Wedbush analyst Dan Ives describes the current market environment as a “1995 moment” rather than comparing it to the beginning of the dot-com bubble.

“This is nowhere near the 1999/2000 period in our view, as high valuations, lack of monetization/infrastructure, weak balance sheets, frothy business models and the overall backdrop were in a very different world then compared to what we see today,” he wrote. Ives in a note to clients.

Chris Danley, head of US semiconductor research at CityCity, echoed Ives' optimistic view of the technology, telling Yahoo Finance that he “sees no end in sight.”

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“We have a long way to go until we start ringing alarm bells or even hearing the bells ring,” Danieli told Yahoo Finance Live.

Beyond the technology and below the surface, the underlying trends are positive. Market breadth – an indicator of bullish sentiment – is slowly starting to improve. The S&P 500 Equal-Weighted Index (SPXEW) and small-cap stocks outperformed the S&P 500 over the past month.

“The expansion we're seeing is happening in a subtle way,” Liz Ann Saunders of Charles Schwab told Yahoo Finance, adding that change beneath the surface is “not a bad thing.”

It is important to note that history says that high concentration does not necessarily indicate a market top. Goldman Sachs analyzed market concentrations over the past 100 years and found that the S&P 500 often rose after previous concentration peaks.

“One consistent pattern around periods of high concentration is large swings in momentum,” Ben Snyder, an equity analyst at Goldman Sachs, wrote in a note to clients. “While the performance of high momentum leaders was inconsistent, the performance of previous laggards was underestimated in absolute terms in each episode. This supports our view that 'catch-up' by laggards is more likely to halt a sustained momentum rise than 'catch-up'.” Ahead of recent market leaders.”

Sina Smith He is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSSmith. Advice on deals, mergers, activist positions, or anything else? Email [email protected].

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