JPMorgan Analysis: S&P 500 Rally Echoes Dot-Com Bubble, Raises Concerns Over Market Concentration in 2024

JPMorgan’s quant strategists, led by Khuram Chaudhry, contend that the current S&P 500 rally shares notable parallels with the dot-com bubble, despite assertions of the latter’s unique “irrational exuberance.”

Highlighting a significant investor concern for 2024, Chaudhry emphasizes the heightened and persistent concentration in US equity markets.

The top ten stocks on the MSCI USA Index, including the “Magnificent Seven,” now constitute 29.3% of the index, nearing the historical peak of 33.2% witnessed in June 2000.

The top five stocks alone contribute 21.7%, just below the post-1994 high of 22.4%.

Chaudhry underscores the striking similarities between the current concentration and that of the dot-com era, especially in the overrepresentation of technology stocks.

Presently, only four sectors are represented in the top ten stocks, diverging from the historical median of six sectors during the dot-com bubble.

The current sector allocation is even less diverse than at the height of the Dotcom bubble, with only four GICS sectors represented now compared to six back then.

Despite variations, Chaudhry notes that while current valuations are lower, the risk associated with market concentration isn’t as critical as in the dot-com era.

However, the strategists caution that extremely high valuations may indicate concentration levels nearing their limits, potentially leading to a market correction as a natural rebalancing mechanism.

Anticipating potential market pullbacks, the strategists emphasize the increasing likelihood of the broader index outperforming the top ten stocks, especially considering recent significant market moves and extreme equity positioning.