Just 10 stocks are doing all the lifting on the S&P 500 this year. But it's looking like too much of a good thing: Now three of them are overvalued, Morningstar says.
Apple, Nvidia and Broadcom — which together account for nearly 40% of the S&P 500's market-value gain this year — are trading for more than they're worth, says a new report by David Sekera, U.S. market strategist at Morningstar. And only one of the S&P 500's top 10 market-value-driving stocks — Alphabet — is still undervalued.
Seeing all these giant stocks overvalued is a new development this year. Coming into 2023, nine of the 10 S&P 500 stocks to drive the market were considered undervalued by Morningstar. "(The) technology sector (is) becoming overvalued as stocks surge on excitement surrounding artificial intelligence," the report said.
But not all investors would agree. It's important to note that many leading stocks are "overvalued" using traditional metrics — right when they take off. Selling too early, especially with stocks like Nvidia, could leave investors out of big gains.
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Concerns Of A Top-Heavy S&P 500
On its surface, the S&P 500 looks like it's thriving. The SPDR S&P 500 Trust ETF is up nearly 12% this year. That's enough to put $3.8 trillion of wealth into investors' pockets.
But if you dig a little, you see just how precarious the situation is. Just 10 stocks are driving all the gains. In addition to Apple, Nvidia and Broadcom, stocks powering the S&P 500 are Microsoft, Amazon.com, Meta Platforms, Tesla, Advanced Micro Devices and Salesforce.
The rally is top-heavy on growth stocks, Sekera says. "The rally thus far this year has been heavily concentrated in the growth category, which has soared 19.29%, whereas core stocks have lagged, only rising 2.11%, and value has lost ground, at negative 2.23%," he said.
Morningstar now thinks large-cap S&P 500 growth stocks are fully valued. But value-priced stocks, especially smaller ones, are roughly 40% undervalued. Energy stocks are also undervalued.
What does this mean if you own the tech stocks that have run up this year? Sell, Morningstar suggests.
"The technology sector is now the most overvalued sector, trading at a 4% premium over our intrinsic valuations, whereas at the beginning of the year it traded at a 19% discount," Sekera said. "While select individual opportunities remain, from a sector perspective, we now think this is a good time to take profits and move toward an underweight position."
What To Do With Nvidia?
Nvidia is one of those battleground stocks, though. Trading for a P-E of more than 200, it looks overvalued using traditional metrics. But IBD's methodology urges investors to hold on. Only after dropping below the 10-week moving average, of 313, would it be time to consider selling. And Nvidia shares, at 385, are still well above those levels.
Most Top Techs Are Overvalued: Morningstar
Biggest contributors to the S&P 500's gains this year
| Company | Symbol | Contribution to S&P's 2023 gain | Year-to-date change | Morningstar Stars | Valuation |
|---|---|---|---|---|---|
| Apple | 20.1% | 38.2% | 2 | Overvalued | |
| Microsoft | 19.2 | 40.1 | 3 | Fair value | |
| Nvidia | 16.2 | 168.0 | 2 | Overvalued | |
| Alphabet | 12.2 | 42.8 | 4 | Undervalued | |
| Amazon.com | 11.3 | 49.2 | 3 | Fair value | |
| Meta Platforms | 10.1 | 125.5 | 3 | Fair value | |
| Tesla | 8.0 | 76.7 | 3 | Fair value | |
| Broadcom | 2.7 | 43.5 | 2 | Overvalued | |
| Salesforce | 2.3 | 58.3 | 3 | Fair value | |
| Advanced Micro Devices | 2.0 | 82.1 | 3 | Fair value |
Sources: Morningstar, S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
