Key Takeaways:
- The S&P 500 rose nearly 4% in Q2, driven by surging semiconductor stocks and tech mega-caps, even as the majority of the index declined.
- AI’s impact extended beyond tech, boosting utilities and green-energy stocks due to the AI revolution’s massive electricity needs.
- Concerns include narrow market breadth, overextended chip stocks, and the S&P 500’s heavy tech concentration as we head into the second half.
The S&P 500 had a strong second quarter powered by big tech stocks, raising some analysts’ concerns. The market-cap-weighted S&P 500 gained 3.9% over the quarter, closing at record highs nine times, while the equal-weight index fell 3.1% from its Q1 peak.
AI Drives Tech Gains
Artificial intelligence was the key driver behind Nvidia’s (NVDA) 36% quarterly gain and Apple’s (AAPL) rebound from its Q1 slump. These tech giants, each with market caps above $3 trillion, made a tepid market appear red-hot.
Sector Performance
Just three of the S&P 500’s 11 sectors outperformed or matched the broader index in Q2: Information Technology (+13.6%), Communication Services (+9.1%), and Utilities (+3.9%). About 25% of S&P 500 stocks outperformed the index itself. Within tech, only semiconductors outperformed the S&P 500. Nvidia briefly became the world’s most valuable company, while Broadcom (AVGO) and Qualcomm (QCOM) also saw significant gains.
Software, however, shed 3%, with Salesforce (CRM), Shopify (SHOP), Workday (WDAY), and MongoDB (MDB) all experiencing declines due to disappointing results. Oracle (ORCL) saw its stock jump, not from earnings but from announcing a cloud partnership with Microsoft (MSFT) and OpenAI.
Broader Market Trends
Investors’ appetite for AI plays extended beyond chipmakers. First Solar (FSLR), dubbed a potential AI beneficiary, was the S&P 500’s second-best performing stock after Nvidia. Utilities like Vistra (VST), NRG Energy (NRG), and NextEra Energy (NEE) also saw significant gains.
Analyst Concerns
Despite these successes, the energy, financial, health care, industrial, materials, and real estate sectors declined since March. About 60% of the S&P 500 finished the quarter in the red.
The divergence between the S&P 500 and its components was evident in June. Nvidia and other chip stocks soared, but the S&P 500’s advance-decline line, a measure of stock movement, began to slide, signaling potential trouble. On June 12, when the S&P 500 hit its fifth record close of the quarter, only 34% of S&P 500 stocks closed above their short-term 20-day moving average, the lowest percentage since 1990, according to Adam Turnquist, Chief Technical Strategist at LPL Financial.
Future Outlook
Some market watchers see room for the bull market to run if Q2 earnings meet expectations. Only three sectors—consumer staples, industrials, and materials—are expected to report earnings contractions, while seven are forecast to report earnings growth exceeding 5%.
History favors the market, as the S&P 500 rises over 80% of the time when first-half gains are 10% or higher, with average second-half gains of nearly 8%, according to an LPL Financial note.
However, narrowing market breadth is a warning sign. The lack of confirmation in the latest breakout raises the risk of a pause or pullback unless the rally broadens, Turnquist said. Analysts at Piper Sandler echoed this, suggesting a likely correction as momentum waned near the end of the month and defensive stocks began to perform well.