We believe in the old saying: a picture is worth a thousand words. Here, we aim to recap recent market action and provide some perspective to investors.

Taking Stock of the Current Market

One of the most common themes I hear when talking to clients and advisors is worries about the concentration of the stock market. At the beginning of this year, the top 5 stocks in the S&P 500 accounted for over 25% of the market cap of the entire index, marking the highest level of “top-heaviness” in at least 35 years (dot-com bubble included). This raises questions both about the overall health of the market – despite being at all-time highs – and about whether a bubble is forming in the mega-cap Tech stocks accounting for the index’s concentration. Let’s briefly dig into both questions.

It is true that mega-cap Tech has been market leadership and a dramatic outperformer of late (the cherry on top coming via Nvidia’s blowout earnings report). What’s less discussed is that both the Health Care and Industrials sectors are at all-time highs, with Financials, Consumer Staples, and Materials all ~5% or less from new records, as well. Perhaps the best example of market breadth, however, is the recent performance of the S&P 500 Equal Weight (i.e., all 500 stocks get equal representation), which made a new 25-month high last week and sits only 1% below its all-time record. Big Tech remains leadership amid the AI proliferation and resilient U.S. economy, but the overall market is far from narrow.

Furthermore, strength abroad is expanding. Japan, India, France, Mexico, and Taiwan are all at or near alltime highs, with plenty of other markets rallying alongside them. The MSCI All Country World ex-USA index is less than 1% from a new record despite China, one of its biggest weights, being in a deep bear market.

As to the second question, I’m a bit more conflicted. On one hand, there are certainly signposts that enthusiasm for AI is a bit frothy (a la the internet in the late 1990s). At the same time, the companies at the top of the market today are primarily profitable, cash-rich, and low debt enterprises. It’s not that they can’t fall (just look at 2022), but the rich valuations are much more backed up by earnings power and fundamentals than was the case during the speculation seen by late-1999 and 2000.

Another way to look at the question is via Strategas’ bull market top checklist, where they have 0 of 9 items checked (compared to 9 of 9 in 2000 and 2007). Though the market sits near all-time highs, evidence that the current bull market should peter out in the near-term is scant. Is a correction likely? Absolutely. They’re inevitable, even in good times. But the overall market setup looks pretty solid, and while sentiment is something to watch, any unearned euphoria seems in check for now.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the
investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All
investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.
Copyright 2024 Robert W. Baird & Co. Incorporated.

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert
W. Baird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB, and is a company authorized and regulated by the Financial Conduct Authority. For the purposes of the Financial Conduct Authority requirements, this investment research report is classified as objective.

Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL
is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from Australian laws.This document has been prepared in accordance with FCA requirements and not Australian laws.