The so-called Magnificent 7, consisting of Microsoft, Meta Platforms, Amazon.com, Apple, NVIDIA, Alphabet, and Tesla, has continued to outperform year-to-date after massive returns in 2023. While the market has shown signs of broadening beyond these largest stocks, there are concerns about what will happen when these leaders eventually falter.
In 2023, mega-capitalization stocks outperformed the average S&P 500 company by the widest margin since the late 1990s tech bubble. The largest ten companies now make up almost 34% of the total market capitalization of the S&P 500, raising concerns about market concentration. However, market concentration has been higher in the past, and there is no clear indication of an imminent decline in the market.
Momentum strategies have been successful in 2024, with many of the same top-performing stocks, like the Magnificent 7, continuing to outperform. Looking at historical data, momentum stocks have had positive returns 60% of the time, with a median return of 7.4%. The evidence does not suggest an inevitable decline in the market in the next year.
While there are similarities between the current market and past periods that saw eventual downturns, such as the tech bubble and the Global Financial Crisis, the current large technology companies are highly profitable. The excitement around technology and AI may impact future returns, but a widespread market bust seems unlikely at this point.
The upcoming monthly jobs report will provide crucial economic data for the markets. While there are no signs of a softening labor market that could lead to a recession, the report will be closely watched for implications on the economy, wage pressures, and inflation. Market odds are currently in favor of a Federal Reserve rate cut in June or July, with three cuts of 25 basis points each expected in 2024.
Despite concerns about investor sentiment and lofty stock valuations, historically, the performance of a concentrated market has not always led to negative outcomes. It is important for investors to ensure their portfolio matches their risk tolerance and exercise caution given the recent strong performance of stocks. The first quarter of the earnings season will begin soon, providing more insight into the market’s outlook.
