20-Year High Bullish Sentiment Meets Record Tech Allocation: Recipe for Disaster?
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- Last week marked a rare decline for key indexes, but an unusual surge in bullish sentiment is evident, reaching levels not seen in two decades.
- The frenzy is fueled by an unprecedented frequency of new all-time highs in 2024, with 11 already, creating FOMO among investors.
- The dominance of tech giants in the S&P 500 raises concerns about market concentration and its consequences.
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Last week, major US stock indexes experienced a slight decline, marking only the second negative week in the past 16.
Asset Classes Weekly Performance
If that was all, everything would appear normal. However, bullish sentiment continues to surge at exceptionally high levels, reaching its highest point in 20 years.
Investor Sentiment Vs. S&P 500
This sentiment arises from the increasing frequency of new all-time highs in comparison to 2022 and 2023, where the markets saw just one high each year.
In 2024 alone, there have been 11 new highs already, contributing to the rising FOMO, especially evident in tech stocks.
The allocation to tech is at its highest level since August 2020.
Is a Rotation Toward the Tech Sector Ongoing?
Tech Sector Allocation
To be more specific, let’s focus on six stocks in the S&P 500, each boasting stellar valuations that might seem almost hard to fathom
- Microsoft (NASDAQ:MSFT) ($3.1 trillion)
- Apple (NASDAQ:AAPL) ($2.9 trillion)
- Nvidia (NASDAQ:NVDA) ($1.8 trillion)
- Amazon (NASDAQ:AMZN) ($1.8 trillion)
- Google (NASDAQ:GOOGL) ($1.9 trillion)
- Facebook (NASDAQ:META) ($1.2 trillion)
An article by Bank of America pointed out that Nvidia alone is worth more than the entire Chinese stock market.
This means that Google, Amazon, Apple, and Microsoft are all larger than many stock markets, increasing their allocation in the S&P 500 index.
S&P 500 Top 10 Holdings
This implies that the top 10 holdings represent one-third of the index, and when we broaden our perspective to include the top 25 holdings, they collectively account for 46 percent of the entire index.
The Magnificent 7’s combined annual profits surpass those of stocks listed in all countries except China and Japan. 
Profit by Market Cap
This might not seem normal but this is evident in other markets as well. Take China for example.
The top 10 stocks constitute over 57 percent of the index, and the top 5 represent almost 38 percent of the market capitalization.
It’s important to acknowledge that these high concentrations can be risky and markets can eventually experience a deep correction. Many might find it hard to admit, but inevitably, they will at some point.
The VIX, which serves as a barometer of market sentiment, currently indicates a sense of calm among investors, remaining well below the 20 level.
S&P 500 and VIX Chart
Investor overconfidence, prevalent at the end of 2023, has persisted into the current year.
The inverse correlation between stock market and the VIX appears to hold: when the VIX is at low levels, stocks generally rise, and vice versa.
However, it is crucial to note that these low levels often precede a bearish market reversal statistically.
The question arises: why? There exists an inverse relationship between the volatility index and investor sentiment.
Historical data indicates that prolonged periods of low readings were followed by moments of heightened volatility and subsequent stock retracements.
Additionally, the VIX’s seasonal volatility tends to surge between mid-February and March, raising concerns about a potential downturn in equities.
The key variable lies in the magnitude of possible retracements, which, at present, are being overshadowed by soaring market highs.
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