Market snapshot: pause for reflection as tech rally stalls

There may be increasing signs of a pause for reflection as investors consider the disproportionate effect of technology shares on market performance this year, as well as the concentration risk that brings.

The most topical example, of course, is NVIDIA Corp (NASDAQ:NVDA), which last week briefly became the US market’s largest company by value and whose shares remain up by 155% in this year alone. While Friday’s 3% decline was far from substantial, it adds to a drop of 3.5% the previous day, prompting questions on whether its rally has become overextended and whether the potential for AI in this particular stock is reaching saturation.

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At the same time, data from S&P Dow Jones indices showed on Friday that around 60% of the S&P500’s total return this year has come from just five stocks – Nvidia, Microsoft Corp (NASDAQ:MSFT), Meta Platforms Inc Class A (NASDAQ:META), Alphabet Inc Class A (NASDAQ:GOOGL) and Amazon.com Inc (NASDAQ:AMZN). Drilling deeper, there could also be an element of smaller cap stocks now being in bargain territory having been left behind in the mega cap tech surge, although it remains to be seen whether a rotation out of tech into more traditional value stocks will follow.

Meanwhile, US data continues to muddy the economic waters in providing seemingly contradicting data. The latest release of manufacturing and services PMI data grew once more to 54.6 in its highest reading in over two years. This area of strength was in contrast to home sales falling for a third straight month, as a resurgence in mortgage rates deterred some potential buyers.

With employment yet to show any persistent signs of decline, inflation will again be in focus this week with the latest Personal Consumption Expenditures report on Friday, reportedly the Federal Reserve’s preferred measure of prices, which is expected to have declined further to 2.6% in May.

In the meantime, and moving into the last week of trading in June, the main indices are set fair for a strong performance at the half-year stage, with the Dow Jones having risen by 3.9%, the S&P500 by 14.6% and the Nasdaq by 17.8%.

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Asian markets were mostly lower overnight, with Japan remaining the focus of investor attention following the minutes of the latest central bank policy meeting. The weakness of the yen remains a concern to the authorities, with further intervention a possibility, while at the same time the potential of strengthening inflation raises the possibility of a further interest rate hike.

Even so, the Nikkei index has fared well so far this year, with a rise of 16% driven by a resurgence of interest in the country in tandem with a rotation out of Chinese stocks, as well as the weakness of the yen which has provided something of a boost to its exporters.

In the UK, the FTSE100 limped to a weak open in the absence of any obvious immediate catalysts, with most mining stocks under pressure in reflection of a risk-off mood among investors.

One bright spot came from Prudential (LSE:PRU), who announced a new $2 billion share buyback programme to be completed by 2026. The company has revised its free surplus requirement ratios which in turn could unlock the potential for more shareholder returns and the shares rose by around 5% on the news. The share price hike provides some relief to what has been a torrid time for the insure, where doubts over China’s economic performance in particular have weighed heavily on the stock, forcing the shares lower by more than 35% over the last year.

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The final reading for UK GDP is due later in the week, while the corporate calendar remains light ahead of the impending deluge of half-year results which will wash through in July.

The FTSE100 has added 6.5% in what has been a relatively strong performance in the year to date, with some warming of sentiment towards the UK in general also contributing to a 3.5% gain for the FTSE250, which has also seen an increasing number of its constituents the subject of opportunistic bid approaches.