Updated December 30th, 2023 at 11:20 IST
Will the momentum of Magnificent Seven sustain US stock surge in 2024?
In the past year, the Magnificent Seven saw individual stock gains ranging from 50% to 240%, collectively contributing to nearly two-thirds of t
As 2023 draws to a close, fund managers are facing a pivotal decision for the upcoming year – whether to stick with the Magnificent Seven, comprising Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla, or explore opportunities beyond these tech giants that have been the driving force behind the impressive performance of US stocks.
In the past year, the Magnificent Seven saw individual stock gains ranging from 50 per cent to 240 per cent, collectively contributing to nearly two-thirds of the S&P 500's 24 per cent gain.
While these companies have been highly rewarding, their heavy weightings in the index have raised concerns about market concentration. BofA Global Research's recent survey highlighted that fund managers considered owning these seven stocks as the "most crowded" trade.
However, the landscape is evolving, with expectations of a Federal Reserve interest rate cut and economic resilience beyond the tech sector.
Some investors argue that the substantial rallies in the Magnificent Seven may leave them overvalued and susceptible to profit-taking.
Jonathan Cofsky, a portfolio manager at Janus Henderson Investors, suggests that despite the positive impact of these seven companies on the market, there may be more opportunities in other sectors, contingent on interest rates and economic conditions.
Recent data from the Apollo Group indicates that a record 72 per cent of S&P 500 stocks underperformed the index in 2023, signalling a potential shift. The equal-weight S&P 500 and the previously sluggish small-cap Russell 2000 demonstrated signs of broadening market participation in December.
The weight of the Magnificent Seven in the S&P 500 raises concerns about the broader market's health, stressing upon the importance of other stocks stepping up if these giants face a challenging year.
Key factors influencing the market in 2024 include the trajectory of inflation, the Fed's rate-cutting decisions, and the continued strength of the US economy. Additionally, the lead-up to the US presidential elections in November could introduce heightened market volatility.
The factors that initially attracted investors to the Magnificent Seven, such as size, competitive advantages, and excitement over emerging technologies like artificial intelligence, may not be easily replicated in other market segments.
While the Magnificent Seven are projected to maintain strong earnings growth in 2024, they trade at higher valuations compared to the rest of the S&P 500. Their average forward price-to-earnings ratio is 33.6 times, considerably higher than the S&P 500's 19.8 times.
Despite the challenges, some investors remain optimistic about the Magnificent Seven's appeal, anticipating continued interest from investors looking for a repeat of their stellar performance.
The dominance of these stocks in key indexes makes them widely held by mutual funds and ETFs, potentially benefiting as more money enters the stock market.
(With Reuters Inputs)
Published December 30th, 2023 at 10:26 IST