© Reuters. FILE PHOTO: A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S. June 14, 2022. REUTERS/Brendan McDermid/File Photo
By Lewis Krauskopf
NEW YORK (Reuters) – As a strong year for U.S. stocks draws to a close, fund managers face a potentially stark choice in 2024: stick with the few big names in growth and technology which have propelled the stock indices upwards, or try their luck on the American stock market. rest of the market.
Stocks of the so-called Magnificent Seven – Apple (NASDAQ:), Microsoft (NASDAQ:), Alphabet (NASDAQ:), Amazon (NASDAQ:), Nvidia (NASDAQ:), Meta Platforms (NASDAQ:) and Tesla (NASDAQ:) – have individually climbed between around 50% and 240% in 2023, making it one of the highest-rewarding bets on the market.
Because of their heavy weighting in the , the seven have been responsible for nearly two-thirds of the benchmark index’s 24% rise this year, according to data from earlier this month. The , which focuses more on technology, has jumped 43.4% this year, its biggest annual increase since 2020.
It’s no surprise that money managers in BofA Global Research’s most recent survey said owning all seven stocks was the “busiest” trade in the market.
But expectations that the Federal Reserve will cut interest rates next year while the economy avoids recession have awakened other parts of the market in recent weeks. Meanwhile, some investors say the seven countries’ huge rallies may have left them overvalued or vulnerable to profit-taking.
“When seven companies that are prominent in the index all move up, that’s good for the market,” said Jonathan Cofsky, portfolio manager for the global technology and innovation team at Janus Henderson Investors. “But I think there’s probably more opportunity in the rest of the market, depending on rates and the economy.”
Apollo Group data released earlier this week showed that 72% of S&P 500 stocks have underperformed the index this year, a record.
However, there are signs that the recovery is broadening. The equal-weighted S&P 500 index – a gauge of the average stock – climbed 6.7% in December compared with a 4.5% rise for the standard index, after lagging for most of the ‘year.
Meanwhile, previously sluggish small caps soared 12% in December, their biggest monthly gain in three years.
With the Magnificent Seven’s weighting increasing in the S&P 500, a bad year for the group could spell trouble for the broader market if other stocks don’t pick up the slack.
Other important factors for the market next year include whether inflation will continue to ebb, allowing the Fed to cut rates at the pace markets expect, as well as the continued resilience of the U.S. economy. The run-up to the US presidential elections in November could also increase market volatility.
Of course, other segments of the market may struggle to replicate the characteristics that initially attracted investors to these seven sectors. Their size and competitive advantages made them a refuge for investors worried about the economic fallout from the aggressive monetary tightening undertaken by the Fed to calm soaring inflation.
Excitement over the commercial potential of emerging artificial intelligence technology also helped propel some mega-caps into 2023, including Nvidia and Microsoft, which surged 239% and 57%, respectively.
Another factor is profitability: The Magnificent Seven is expected to post a 39.5% increase in overall profits in 2023, compared to a 2.6% decline for the rest of the S&P 500, according to LSEG data. Their earnings growth is expected to outperform again in 2024, albeit to a lesser extent.
But Magnificent Seven stocks are trading at higher valuations overall after their gains. According to LSEG Datastream, they recently traded at an average forward price-to-earnings ratio of 33.6 times, while the S&P 500 was at 19.8 times.
“They’re not going to get the low-hanging fruit of a weak year as a … starting point,” said Matt Benkendorf, chief investment officer of Vontobel Quality Growth Boutique.
Vontobel Quality Growth holds Microsoft, Amazon and Alphabet in its portfolios, but not the other four companies where Benkendorf sees more operational challenges.
Cofsky, meanwhile, said his funds hold at least some of the Magnificent Seven, but he sees a potential rotation into small- or mid-cap tech stocks in 2024 if rates continue to moderate.
Brian Belski, BMO Capital Markets strategist, recommended investors hold “a little bit of everything” in the coming year, given his “expectation of individual equity participation broadening significantly,” after being limited compared to history in 2023.
Others believe the Magnificent Seven will continue to attract investors hoping for a repeat of their performance this year.
The Magnificent Seven’s dominance in key indexes means they are largely held by mutual funds and ETFs and could benefit as more money flows into stocks, said manager Francisco Bido senior portfolio manager at F/m Investments.
He considers all seven stocks to be long-term holdings in his portfolios, with the exception of Tesla.
“It’s a bit of a feedback loop,” Bido said. “They’re growing, people want more.”