Kelly Evans: The “Fab Five”

Scott Mlyn | CNBC

Either we're in a bubble, or the market is about to break out to new highs. Both can't be true...right?

I'm talking about the fact that the semiconductor stocks continue to hit new record highs. These chip stocks are traditionally seen as a "leading indicator," meaning their upswing is supposed to portend a broader upward move both in stocks and the whole economy. And their widely followed ETF, the SMH, just hit another new high this morning, which would seem to be a very promising sign.

But you know where I'm going with this. Fully 25% of the SMH is now Nvidia, the breakout darling of this decade. That stock has gone from $6 to $131 in just four-and-a-half years, for a gain of nearly 2200%! It already briefly eclipsed Apple to become the second most valuable stock in the entire market, closing just behind Apple on Friday at $3.25 trillion.

So are these stunning statistics truly a sign that the economy may yet start booming, or the classic hallmark of a major correction that is about to happen?

BTIG's Jonathan Krinsky is in the correction camp. The market leadership has become so narrow in the mega-caps, he notes, that last week for the first time ever we saw a bizarre technical divergence: the relative strength of the S&P 500 closed above 70 (an overbought sign), while the relative strength of the equal weight S&P closed below 50, a bearish sign. The biggest stocks in the market-cap weighted S&P are overbought, in other words, while the "typical" stock is breaking down.

Other signs of this wide divergence: so far this year, the S&P is up 15% (wow), while the equal-weight index is up just 5%. The "fabulous five" of Nvidia, Microsoft, Amazon, Alphabet, and Meta posted year-on-year earnings per share growth of 84% in the first quarter (double wow), versus just 5% for the typical S&P stock, according to Goldman's David Kostin.

I feel like it's obvious, but again worth stating, that if not for the AI revolution we'd probably be headed into recession by now. Remember the post-pandemic "chip glut" that was supposed to happen? I wrote about it in October of 2021, when the SMH ETF was trading around $150. It sank all the way below $100 a year later. Then it took off, hitting $271 this morning thanks to the AI rocket fuel.

If you're not part of the AI revolution, though...it's a much different story. Whether you're Tesla (hampered by a post-pandemic EV glut), a furniture provider like RH (whose shares plunged 17% last week), or McDonald's, which raised prices to the max and is now being forced to reverse course and offer a $5 value meal, this is closer to a recessionary environment.

So yes, we see strategists raising their S&P 500 price targets even as the unemployment rate is moving up. Goldman just boosted its S&P target to 5600 for year-end. Evercore ISI went to 6000!

"For the elite, transformational tech stories such as Microsoft and Nvidia...investors must see the forest through the trees to where this spending wave (and earnings estimates) can head over the next three years," wrote Wedbush's Dan Ives over the weekend. "The race to $4 trillion market cap" between Nvidia, Microsoft, and Apple is on, he posits.

I wish I knew whether the "fab five" will "catch down" to the rest of the market, or whether, as Ives believes, they can continue to power the U.S. economy forward. All I know for sure is that without them, things would be much bleaker. And thus continues the incredible efflorescence of American innovation.

See you at 1 p.m!

Kelly

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Twitter: @KellyCNBC

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