A few days ago, I explained why the AI “bubble” label may be a misleading characterization of the US equity market.

Long story short, there’s some evidence to suggest the rally’s broadening out and depending on how you slice and dice performance, you can show a market that’s leaning more towards cyclicals than “safe” bond proxies and so on.

I don’t necessarily buy it, but I try to present both sides of every debate where possible. Sometimes I go out of my way in that regard. For example, I endeavored to tell the story of America’s culture wars from “the other side of tracks,” so to speak, in the latest Monthly Letter.

At the end of the day, though, it’s pretty hard to escape the notion that cap-weighted US equity benchmarks are so skewed as to be largely meaningless as snapshots of corporate America. Because corporate America’s more than just bits and bytes. But what matters is sales and profits. And on that score anyway, it’s bytes and bits with a little Lilly in there this quarter for good “measure” (get it?).

As the table from Goldman shows, the largest stocks (excluding JPMorgan and Berkshire) will probably grow the top-line by 15% versus essentially no sales growth for the other 490 companies.

The margin picture’s even starker: The top companies are seen posting 380bps of margin expansion for Q1 versus 57bps of contraction for the rest of the index. That speaks to the dramatic disparity in profit growth expectations: 31% for the top names and -4% (that’s negative 4%) for every”one” else.

The table below, again from Goldman, gives you a sense of how extreme the situation is within sectors.

Take a look at Comms Services. EPS growth for the sector is seen at 22% for Q1. But the median stock is seen posting a 3% decline in profits.

Importantly, concentration is itself more concentrated in 2024: Nvidia and Meta are up dramatically, while Tesla and Apple have lagged badly.

“Investors are asking whether the divergence in performance among the largest stocks will be reflected in Q1 operating results,” Goldman’s David Kostin remarked, noting that the divergence witnessed between those four companies (Nvidia and Meta on one side of the “Magnificent 7,” Tesla and Apple on the other) is a “reflect[ion] of the varied forward outlooks.” (Tesla’s having a rough ride in 2024.)

Coming quickly full circle, it’s at least not unfair to characterize the US equity market as a tech/AI “bubble” depending on your definition of bubble. The big question’s whether the rest of corporate America will catch up or whether “tech+” / “Mag 7” will catch down.

“Failure to meet elevated growth expectations sparked the downfall of the largest stocks at the height of the Tech Bubble,” Kostin went on, before reiterating the bank’s generally constructive outlook.

“Historically, periods of high concentration have been more often followed by a ‘catch up’ of the other stocks in the index rather than a ‘catch down,'” he said, describing the chances of a dot-com redux as “relatively slim.”