Amidst a backdrop of a promising economic forecast and a dovish stance from the Federal Reserve, investors are expanding their horizons beyond the dominant growth and technology stocks that have been driving the U.S. stock market’s upward trajectory in recent times.
“While stocks like Nvidia and Meta Platforms have been the primary catalysts for market rallies in 2024, other sectors such as financials, industrials, and energy are also showcasing robust performance, surpassing the S&P 500’s 9.7% year-to-date gain,” notes a recent report.
This diversification of performance across sectors alleviates concerns of overreliance on a handful of stocks for market momentum.
Investor sentiment is bolstered by the belief in the economy’s resilience alongside expectations of waning inflation.
This optimism received a notable reinforcement from the Federal Reserve’s recent announcement, wherein the central bank expressed confidence in its ability to manage inflationary pressures while hinting at potential interest rate cuts in the coming year, despite revising its forecast for U.S. economic growth upwards.
“There is more confidence that the Fed is going to be able to … get inflation approaching their longer-term targets without a recession,” remarked Scott Chronert, head of U.S. equity strategy at Citi, which is overweight the technology, financial, and industrial sectors.
“You are going to take a little bit more comfort that you can own a bank or an industrial if you think the Fed is going to lower rates at some point here.”
In the upcoming week, investors will closely monitor Friday’s personal consumption expenditures price index, providing the latest insights into inflation. Additionally, the conclusion of the first quarter may introduce volatility as fund managers adjust their portfolios.
This expanding rally marks a departure from the previous year when uncertainty surrounding the economic outlook led investors to seek refuge in the so-called Magnificent Seven group of megacap stocks, attracted by their dominant industry positions and robust balance sheets.
Solely the sectors housing mega caps – tech, communication services, and consumer discretionary- outperformed the S&P 500’s 24% gain last year.
This year, the financial and industrial sectors have seen gains of 10.1% and 9.9%, respectively, while energy has surged by 10.3%.
In a broader context, the Magnificent Seven – Apple, Nvidia, Alphabet, Tesla, Microsoft, Meta Platforms, and Amazon.com- collectively account for 40% of the S&P 500’s gains as of Thursday, as per S&P Dow Jones Indices. This marks a notable decrease from their share of over 60% last year.
“The wider rally ‘means that leadership isn’t so concentrated and susceptible to a correction,’ remarked Robert Pavlik, senior portfolio manager at Dakota Wealth.
Following the significant gains posted by the Magnificent Seven in 2023, their performance has shown more divergence this year, providing investors with another incentive to explore opportunities beyond this group.
The surge in enthusiasm surrounding artificial intelligence has propelled Nvidia shares to a remarkable 90% gain year-to-date, while Microsoft has seen a solid increase of 14.5%. Conversely, Apple and Tesla have experienced declines of about 11% and 32%, respectively, over the same period.
Apple faced another setback this week when the Department of Justice accused the iPhone maker of monopolizing the smartphone market, underscoring regulatory risks that may give investors pause regarding Big Tech.”
Another indication of broadening market participation is the increasing number of S&P 500 stocks outperforming the benchmark, with 180 companies achieving this feat so far this year as of Thursday, compared to 150 last year.
However, certain segments of the market, such as small caps, continue to exhibit muted performance. The Russell 2000, which focuses on smaller companies, has only risen by 2.2% year-to-date.
Some investors speculate that this group could receive a boost from the Fed’s outlook, which maintains a previous forecast of three 25 basis-point interest rate cuts, despite the central bank’s upgraded growth projections.
“As the Fed starts to lower interest rates, that creates liquidity and makes financing easier,” noted Jack Ablin, chief investment officer at Cresset Capital. “Who’s most advantaged? Not the megacap stocks that have unfettered access to capital no matter what rates are, but really the smaller, lesser-known names.”
However, the expanding trend in market participation could face headwinds if the economy begins to falter or overheat, disrupting the so-called Goldilocks narrative that has underpinned market sentiment in recent months.
Some investors are expressing concerns about a potential pullback in the market following a significant run, during which the S&P 500 has surged by 27% since late October.
However, others remain optimistic about the continuation of the current trend. Peter Tuz, president of Chase Investment Counsel, disclosed that his firm recently acquired shares of Goldman Sachs (GS.N) and oil services company Tidewater, while reducing its holdings in megacap stocks, including divesting its stake in Apple.
“The market is broadening out,” Tuz commented. “You’re just seeing that there are more ways to make money this year than the Mag 7.”
