In the world of American investors, two stock markets stand out: the S&P 500 and the Russell 2000. While the S&P 500 soars to new heights driven by one stock, Nvidia, the Russell 2000 index of smaller companies falls by 17% from its peak in November 2021 and does not advance at all this year.
In the S&P 500, which includes some of the largest companies in America, an average stock is trading at about the same level as it was at the beginning of 2022. However, more than half of these stocks have fallen since then. Worse, only 198 of them managed to rise in the past month, even as the index hit new intraday highs on 11 out of 13 trading days. This narrowness in the market is a concern among technical analysts who believe that a wide dispersion of performance among many stocks – what is known as market size – makes a bull market more sustainable.
The performance of these two stock markets can be attributed to two different factors: demand for chips for artificial intelligence applications and concerns about the US economy and interest rates. The first factor led Nvidia, along with a few other stocks and the entire market to new highs, making Nvidia briefly the most valuable company in the world. The second factor pushed most stocks lower, as weak data lowers expectations for growth while central banks continue to focus on slowing inflation.
Investors who passively bought the S&P 500 are currently buying a lot of Nvidia and other AI-related stocks. However, this reliance on just one stock poses a risk if Nvidia stops performing well, especially given that there is no wide dispersion of gains in other parts of
