The Riskiest Time Ever to Invest By Larry Benedict, editor, Trading With Larry Benedict A slight miss from a single earnings report was enough to send stocks reeling. Microsoft (MSFT) is a key player in artificial intelligence (AI) data centers with its cloud services segment. The company’s data center infrastructure business is closely monitored to track AI demand trends. A slightly lower-than-expected growth rate in cloud services revenue during the fourth quarter was enough to send MSFT lower by 10%, erasing $357 billion in market value in a single day. It was the largest single-day decline in MSFT since the pandemic sell-off in March 2020. Microsoft is the fourth-largest company in the world by market valuation and is worth over $3 trillion. It’s also priced for perfection. So when things don’t go exactly as expected, investors are quick to sell… and a bad reaction can have ramifications for the rest of the stock market. If you hold ETFs like SPDR S&P 500 ETF Trust (SPY) or Invesco QQQ Trust, Series 1 (QQQ), that’s leaving your portfolio exposed to a massive risk. Concentration Risk The 10% decline in Microsoft may have hurt investors in the company. But it certainly didn’t stop there. Microsoft’s market value means that it comprises 5.4% of the S&P 500 and 6.1% of the Nasdaq-100. At one point during the trading session following Microsoft earnings, the S&P 500 was down 1.5%, with MSFT alone contributing to a third of the decline. But it’s not just Microsoft posing a risk to a broader market drop. Other stocks leveraged to the AI trade have seen their market values swell to record levels. Concentration in the stock market’s biggest names is running near the highest levels in history. There are 11 companies with a market value greater than $1 trillion. The top 10 stocks in the S&P 500 now make up over 40% of the index. That’s the highest level of concentration in history. In the Nasdaq-100, the top 10 holdings comprise 50%. When those stocks are doing well, investors in index ETFs tracking the S&P 500 and Nasdaq enjoy the ride higher. But it works the other way as well. The reaction in Microsoft shows you exactly what happens when investors question extreme market valuations. And by some measures, investors are exposed like never before… Tune in to Trading With Larry Live 
Each week, Market Wizard Larry Benedict goes live to share his thoughts on what’s impacting the markets. Whether you’re a novice or expert trader, you won’t want to miss Larry’s insights and analysis. Even better, it’s free to watch. Simply visit us on YouTube at 8:30 a.m. ET, Monday through Thursday, to catch the latest. | Priced for Perfection Excessive market values and high levels of concentration also mean that stocks are priced for perfection. As a sector, large-cap growth stocks currently trade at a price-to-earnings (P/E) ratio of 28.8. That’s 45% above the long-term average of 19.8. Even considering expected earnings growth over the next year, the top stocks are still expensive. The top 10 stocks in the S&P 500 trade at a forward P/E ratio of 28.1 compared to the remaining companies in the S&P at 19.2. When stocks become priced for perfection, even the slightest miss can send share prices tumbling, just like we saw with Microsoft. That’s because investors quickly rethink valuation multiples and whether it’s worth paying such a high premium. And since the largest companies in the stock market dominate it like never before, just a few names falling can pull the indexes lower when investors begin questioning valuations against financial results. It doesn’t matter what the rest of the market is doing. That’s one reason right now is a risky time to be an index investor holding ETFs like SPY and QQQ without any hedges or protection. And this could be just the beginning of a bigger shift in the markets. I recently put together a briefing where I explain four separate market forces that are all looking worrisome. If all four of these catalysts collide at the same time, we’re looking at a potential financial reckoning… one that could not only end the current bull market but also kick off a “Lost Decade.” If you want to know how to prepare for what’s coming, then go right here to get the full briefing. Happy Trading, Larry Benedict
Editor, Trading With Larry Benedict Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. | | 
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