Under the impetus of technology stocks, the S&P 500 reached a new high in the US stock market. The AI investment frenzy is generating a capital suction effect, with an impact on the performance of other sectors of the US stock market.
On October 6, the US stock market experienced significant volatility as the S&P 500 index closed above 7800 points for the first time. Large technology stocks performed strongly, partially offsetting the inflationary impact caused by persistently high oil prices and the biggest sell-off pressure in the bond market in years.
The S&P 500 index is widely regarded as the best indicator of the US stock market, comprising the top 500 listed companies in the US, accounting for over 80% of the total market value.
According to a report by The Wall Street Journal on October 7, a group of familiar technology companies are driving the expansion in the field of AI and benefiting from the AI wave. AI is drawing in capital and squeezing other parts of the market. Within the S&P 500 index, of the 100 largest constituent stocks by market cap, 41 were up, whereas only 10 of the smallest 100 stocks recorded gains.
Public data shows that large technology companies in the US, especially AI super-scale operators such as Alphabet, Amazon, Microsoft, and Meta, have long been known for their ample cash reserves and relatively low debts. The “Big Seven of US stocks,” consisting of these four super-scale operators plus Tesla, Nvidia, and Apple, have reached a historic high combined market value of $25 trillion.
Currently, the significant gap between technology stocks and other stocks is widening. Stocks of healthcare companies, banks, and essential consumer goods companies are declining, while small-cap stocks and blue-chip stocks represented by the Dow Jones Index are also on the decline.
The report suggests that many investors believe that these technology stocks can withstand the impact of rising interest rates. Even with rising interest rates and cooling economic conditions putting pressure on other parts of the market, they still expect profit forecasts to continue driving the rise in technology stocks. However, stock market returns are heavily reliant on a few stocks, and certain factors might pose risks to investors, such as significant fluctuations due to concerns like large expenditures and declining free cash flow.
According to a report by Bloomberg on October 7, Savita Subramanian, Head of US Equity and Quantitative Strategy at Bank of America, predicts that the earnings growth rate of the constituents of the S&P 500 index will reach historically high levels in the next five years. “When expectations are so high, compared to real positive surprises, the market is more likely to see disappointments. This is not the tech bubble of 2000, but I am indeed concerned that market sentiment has become extremely bullish.”
The report states that US bonds are becoming more attractive and are truly competing with US stocks for the first time in decades.
Currently, US Treasury bond yields remain at historic highs, with the 10-year yield hitting its highest level since 2002, surpassing 5.3%; while the 30-year yield has risen above 5.7%, marking a new high in 24 years.
Furthermore, Arend Kapteyn, Chief Economist at UBS Investment Bank, stated that apart from the AI sector, businesses and consumers are facing a triple challenge: higher interest rates, higher fuel prices, and a competition with AI companies for employees, equipment, and capital.