After a significant rally in megacap stocks such as Nvidia, Broadcom, and Eli Lilly, there is now a growing concern that these stocks may be overvalued. While the S & P 500 and Nasdaq Composite indexes have reached all-time highs, the steep uptrend in certain megacap stocks has raised red flags for some investors. Nvidia and Broadcom, for instance, have soared by 174% and 61% respectively this year, far outpacing the broader market.
According to Bespoke Investment Group, several megacap stocks like Broadcom, Eli Lilly, Nvidia, Microsoft, and Apple are currently considered “extremely overbought.” This designation is based on their share prices being more than two standard deviations above their 50-day moving average. Notably, Broadcom’s recent 36% surge in June alone has left the stock trading approximately 34% above its 50-day moving average, signaling potentially unsustainable levels.
Broadcom, with a market capitalization exceeding $846 billion, stands as one of the most valuable companies in the S & P 500. Following a successful fiscal second quarter and a 10-for-1 stock split announcement, the stock received a 12% boost and reinforced its overbought status. Similarly, Eli Lilly, closing with a market value over $842 billion, has seen strong demand for its pharmaceutical products like Mounjaro and Zepbound, leading to a 12.5% surge above its 50-day moving average.
Other tech giants like Nvidia, Apple, and Microsoft have also experienced substantial gains this year, causing them to trade well above their 50-day moving averages. Nvidia, in particular, surpassed Microsoft as the most valuable public company during Tuesday’s trading session, underscoring the excessive momentum in these megacap stocks. With valuations stretched and concerns about a possible pullback looming, investors are advised to exercise caution when considering investments in these overbought stocks.
While megacap stocks have led the market to record highs, the rapid ascent in stock prices of companies like Nvidia, Broadcom, and Eli Lilly has raised valid concerns about overvaluation. With signs of extreme overbought conditions and stretched valuations, investors should approach these stocks with caution and consider the possibility of a correction in the near future.