‘American Exceptionalism’ is the brand new buzz phrase in international markets.
An economic system that has not simply defied recession predictions for 2 years in a row amidst vital tightening of rates of interest by the Federal Reserve, however has additionally grown a lot stronger than estimated and as in comparison with different developed international locations.
Add to it the AI revolution, and an upcoming Trump Presidency, ‘warning’ seems to be a phrase that doesn’t exist within the dictionary any extra for traders betting on US shares.
Whereas final week was turbulent for US markets, because the Fed gave a hawkish message, it was only a blip contemplating the stellar returns delivered within the final two calendar years after the bear market within the S&P 500 and Nasdaq Composite bottomed out in 2022. The YTD (year-to-date) return of 25 per cent in S&P 500 and 32 per cent in Nasdaq Composite ramps up the returns from begin of 2023 (when recession was the consensus prediction of economists) to a stellar 55 and 87 per cent, respectively.
Nonetheless, amidst the euphoria over ‘American Exceptionalism’, lies a structural danger.
Market focus
Of the 55 per cent positive factors in S&P 500 because the begin of 2023, 36 share factors have been delivered by simply 10 shares.
In different phrases, round 65 per cent of the positive factors made by the index has been delivered by 2 per cent of the shares. This has resulted in a stage of market focus by no means witnessed earlier than, not even in the course of the dotcom mania.
The highest 10 shares consisting of the Magnificent Seven shares — Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Tesla — and three others — Broadcom, Berkshire Hathaway and Walmart — collectively account for a staggering 39 per cent of the S&P 500 complete market-cap at the moment. That is almost double of what it was 10 years again.
Within the pre-Covid period, the very best stage of focus was witnessed in the course of the dotcom growth, in March 2000, when the highest 10 shares of the S&P 500 accounted for 27 per cent of the full market-cap.
Through the peak of the market bubble in October 2007, the market focus was at 18 per cent.
The structural danger right here is that with eight of the highest 10 being know-how corporations (though it’s being debated whether or not Tesla is a tech or an auto firm), that kind the fulcrum of the AI revolution with huge AI monetisation prospects loaded into their valuations, their shares have now turn out to be too massive to fail.
Not fail when it comes to enterprise (as the large banks did in 2008), however in relation to assembly expectations.
Any hiccups within the long- run path to ubiquitous AI and its monetisation, because it occurred in the course of the Web revolution in 2000 and 2001, can have extreme ramifications for US and international markets.
With so many traders betting a lot on simply 2 per cent of the S&P 500, that is key danger that traders seeking to enter the US markets now should take cognisance of.
Traditionally, such ranges of dominance of some shares has not ended properly for the markets.
