Apple and Nvidia are among the biggest stocks weighing on the S&P 500. Apple and Nvidia may be competing again to become the world's most valuable company, but the recent weakness in the biggest US stocks is holding back the broader stock market.
The 10 biggest stocks in the S&P 500 are struggling to keep up with the rest of the market. RBC strategist Lori Calvasina pointed out in a new note that these companies have started to underperform the other stocks in the benchmark index again. Their weak performance is putting pressure on the overall market because they account for a large share of the S&P 500.
S&P 500 stocks face pressure
The 10 biggest stocks include major technology and AI companies. These are Apple, Nvidia, Amazon, Broadcom, Alphabet's two share classes, Micron, Meta, Microsoft and Tesla. Their performance matters because movements in these large companies can have a major effect on the direction of the S&P 500.
AI spending fears hit megacap stocks
Investors are becoming less confident about when AI investments will start generating returns. Growing doubts about the time companies will need to earn money from their artificial intelligence investments have led investors to move away from some major technology stocks. This shift has triggered sharp declines in several megacap companies and has prevented the wider stock market from making further gains, according to Yahoo Finance.
{{/usCountry}}Investors are becoming less confident about when AI investments will start generating returns. Growing doubts about the time companies will need to earn money from their artificial intelligence investments have led investors to move away from some major technology stocks. This shift has triggered sharp declines in several megacap companies and has prevented the wider stock market from making further gains, according to Yahoo Finance.
{{/usCountry}}Nvidia and Tesla stocks fall
Nvidia and Tesla have fallen sharply from their record highs. Nvidia, which was previously one of the market's strongest performers, has dropped about 13% from its all-time high. Tesla has fallen about 26% from its peak. These declines show that even some of the biggest names in the technology and AI sectors are facing pressure.
Amazon and Alphabet have also recorded double-digit declines from their highs. The weakness is not limited to Nvidia and Tesla. Amazon and Alphabet have also seen their shares fall by double-digit percentages from their respective peaks, adding to concerns about the performance of the largest companies in the market, according to Yahoo Finance.
Meta and SpaceX raise AI spending concerns
Meta and SpaceX have added to concerns about rising AI spending. Their latest earnings reports have increased investor worries after both companies reported negative free cash flow and outlined aggressive plans to spend on artificial intelligence. Negative free cash flow means a company has less cash left after covering its operating expenses and capital spending. Investors are concerned that heavy spending on AI infrastructure could put pressure on cash flows before the investments generate sufficient returns, according to Yahoo Finance.
RBC's Lori Calvasina remains cautious about technology stocks. Calvasina said she was staying on the sidelines of the technology sector after downgrading it to a Market Weight rating earlier in October. This rating generally means she expects the sector to perform broadly in line with the wider market rather than significantly outperform it.
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US midterm elections add to market uncertainty
Rising oil prices are adding to market uncertainty. Higher oil prices are creating another concern for investors as they assess the outlook for stocks. Along with worries about AI spending, this has made investors more careful about buying shares that are already trading near record levels, according to Yahoo Finance.
Investors are also reducing portfolio risks ahead of the November midterm elections. Institutional investors are taking a more cautious approach instead of continuing to buy stocks near their all-time highs. They are waiting for greater clarity on market conditions, political developments and the outlook for technology companies before making further investment decisions, according to Yahoo Finance.
HSBC strategist Max Kettner says investors have less confidence in the market outlook. In a note on Monday, Kettner said HSBC had maintained its strongest preference for stocks over sovereign bonds since mid-March. However, he said the constant flow of changing market narratives had reduced the firm's confidence in maintaining that position, as cited by Yahoo Finance.
The US midterm elections could bring fresh concerns about AI regulation. Kettner said investors may worry about tighter regulation of artificial intelligence if Democrats achieve a strong victory, often described as a "Blue Wave". Such a political outcome could increase uncertainty about the rules governing AI companies and their future business plans, he noted.
Geopolitical tensions in the Middle East are another risk for markets. Kettner also warned about renewed geopolitical concerns surrounding the region. These risks, along with the US elections and uncertainty about AI spending, could make investors more reluctant to take large positions in stocks.
HSBC is also taking a more cautious position on stocks in the near term. Kettner said he was moving to the sidelines on equities as investors face several uncertainties. The shift reflects concerns about AI investment returns, political developments, geopolitical risks and the recent weakness in major technology shares, according to his note cited by Yahoo Finance.
The weakness in megacap stocks remains a major hurdle for the S&P 500. The biggest companies have considerable influence over the index because of their large market values. Until these stocks regain strength or other companies make up for their losses, their weak performance could continue to limit the broader market's ability to move higher.