Saxo Bank: correction in the IT sector can collapse the stock market

The proportion of eight high-tech companies in the S&P 500 has risen to 30%.

Investors in the retail market are showing a strong interest in stocks related to Artificial Intelligence.

The stock market could be drastically impacted by a sudden shift in the IT sector.

In June, the S&P 500 US broad stock market index saw a 30% share held by Alphabet, Amazon, Apple, Microsoft, Netflix, Tesla, NVIDIA and Meta. This was a significant increase from the 22% of the index's market capitalization that these eight companies accounted for at the start of the year, as reported by the Wall Street Journal.

High-tech stocks, such as Alphabet and NVIDIA, are being purchased by investors due to the excitement around AI and the belief that tech companies' solid financial positions will be able to withstand a potential economic downturn in the US.

This year, the shares of NVIDIA have increased by over 100%, while those of Alphabet have risen by 44%.

The Financial Times notes that the fear of missing out is driving retail investors towards Artificial Intelligence (AI). Small investors were slow to join the rally sparked by interest in AI, but now they are increasing their presence in the technology sector's stocks.

VandaTrack reported that intraday purchases of U.S. stocks reached a three-month peak. Apollo Global Management approximates that U.S. households have only used up around half of the approximately $2.3 billion in "surplus" savings that have been built up during the pandemic.

If the tech sector were to suddenly correct or become unpopular with investors, the US stock market could be at risk of a rapid crash due to the over-representation of a few stocks in the S&P 500.

In September 2020, a dramatic shift in technology stocks caused the S&P 500 to drop by nearly 10% in a span of three weeks.

Saxo Bank has identified that the primary risk to the US stock market at present is a potential shift in sentiment towards Artificial Intelligence (AI) stocks.

Previously, Morgan Stanley had cautioned that U.S. corporate profits would drop by 16% in 2023, which could impede the rally of the U.S. stock market and cause the S&P 500 index to dip to 3900 points by the end of the year (-9%).