Handful of large companies are driving the record-breaking share market rally

If you look at the solid share market rallies in both Australia and the United States, one factor really stands out.

Both rises have been powered by a small number of shares that have really taken off – Nvidia and the rest of the tech giants in the US market and Commonwealth Bank (ASX: CBA) and the banking sector in general here in Australia.

That concentration on a few key stocks is something to watch in both markets because it can indicate the possibility of a quick reversal should the market suddenly decide these stocks or sectors are wildly overvalued.

There is no sign of that at the moment and there are signs that the rally is broadening a little through mid-cap and small-cap companies, particularly in the US.

However, some of the rallies in these big stocks have usually taken place without positive analyst reports.

Commonwealth Bank rally catches fund managers on the hop

Here in Australia the rise and rise of Commonwealth Bank shares has caught many analysts and fund managers by surprise and has played a big part in the overall rally.

After the Australian market first ducked above the 8000-point level to a fresh record, Commonwealth Bank had contributed a stellar 129.4 index points alone to the ASX 200’s 426.8-point rise until that point this year.

At that stage Commonwealth shares had reached a staggering $132 each, which is amazing when you consider the shares were trading at less than $100 each in late 2023.

Other companies making an outsized contribution to the share market rally include the fast-improving National Australia Bank (ASX: NAB), Westpac (ASX: WBC) and commercial and industrial property giant Goodman Group (ASX: GMG).

Expensive but still rising

That rise for Commonwealth Bank shares has confounded and annoyed many fund managers, who consider Commonwealth Bank shares to be wildly expensive.

If they happen to be underweight Commonwealth shares, which many would be given that they already saw it as too expensive to buy around the $100 mark, let alone now, that has made the task of them outperforming a simple ASX 200 ETF very difficult.

It is also difficult to see the catalyst for such a solid rise in the price of Commonwealth Bank other than the idea that banks should make higher profits when official interest rates start to trend down and also the fact that the economy seems to be going reasonably well.

Will lower rates arrive as anticipated?

Falling official interest rates are a very plausible scenario from a US perspective where inflation has been falling quite quickly but it is more difficult to anticipate in Australia where inflation has proven to be quite sticky and the Reserve Bank is tipped by some to consider an official rate rise rather than contemplate the start of an easing cycle.

While most investors welcome the bull market, some remain worried that the Australian market has belatedly ridden on the US market’s coat-tails but faces a very different scenario on the interest rate front.

They question whether the heavy hitting stocks behind the rally can hang on to their gains should interest rates stay higher for longer than anticipated.

In many ways it is a similar situation in the US, with the market there seemingly having already banked a series of interest rate cuts.

Should there be any interruption to those much-anticipated series of rate cuts, then the valuation of the hard charging giant companies behind the rally could face some heavy weather.

Fresh records show the value of time in markets

However, what the largely unanticipated rise and rise in the share prices of a small number of large companies in both the US and Australian share markets does demonstrate is the importance of spending time in the market and ignoring a lot of the noise from both the ultra bears and the uber bulls.

Staying exposed to the S&P 500 and ASX 200 indexes through such a period has been a great way to build capital over time, even if it has meant tuning out the naysayers who have been perhaps justifiably pointing out full valuations.

When markets are moving in either direction they can overshoot so staying exposed through thick and thin can avoid a situation in which you are out of the market in a period when prices rise dramatically.