2023-12-28 12:28:23
As a strong year for U.S. stocks ends, fund managers face a big choice in 2024: stick with the handful of large growth and technology companies driving stock indexes higher, or invest in other stocks in the market.
The so-called “Big Seven”: Apple (AAPL-US), Microsoft (MSFT-US)、Alphabet (GOOGL-US), Amazon (AMZN-US), Huida (NVDA-US)、Meta Platforms (META-US) and Tesla (TSLA-US), with their share prices soaring from 50% to 240% respectively in 2023, making them one of the most valuable investments in the market.
Because they are inS&P 500 IndexThe seven companies are heavily weighted in the index, accounting for nearly two-thirds of the S&P’s 24% gain this year. Fund managers in the latest survey from Bank of America Global Research said holding these stocks is the market’s “most crowded” trade.
But in recent weeks, expectations that the Federal Reserve will cut interest rates next year while the economy avoids recession have awakened other parts of the market. Meanwhile, some investors say the Big Seven’s sharp gains could leave them overvalued or vulnerable to profit-taking.
“When all seven large companies in the index are up, it’s good for the market,” said Jonathan Cofsky, portfolio manager in Janus Henderson Investors’ global technology and innovation team. “But I think there may be more in other areas of the market. Multiple opportunities, depending on interest rates and the economy.”
According to Apollo Group data, this yearS&P 500 Index72% of stocks underperformed the market, a record-high ratio.
However, there are signs that the rally is broadening.Equal weightS&P 500 IndexAfter lagging for much of the year, it gained 6.8% in December, while the weightedS&P 500 IndexIt rose 4.5%.
Meanwhile, the previously sluggish Russell 2000 index of small-cap stocks surged about 14% in December and is expected to post its biggest monthly gain in three years.
With the Big SevenS&P 500 IndexIf other stocks do not fill the gap, poor performance of these stocks may cause trouble for the broader market.
Other important factors for stocks next year include whether inflation continues to decline, whether the Federal Reserve can cut interest rates at the pace expected by the market, and the continued resilience of the U.S. economy. The approach to the U.S. presidential election in November could also add to market volatility.
Excitement about the commercial potential of emerging artificial intelligence (AI) technology also drove the development of some large companies in 2023, including Huida and Microsoft, whose share prices rose 238% and 56% respectively.
Another factor is profitability: According to LSEG data, the Big Seven expect total profits to grow 39.5% in 2023, whileS&P 500 IndexOther companies’ profits will fall by 2.6%. Their earnings growth is expected to outperform the market again in 2024, but by a smaller margin.
But the Big Seven’s overall valuations are higher after their gains.Their average forward price-to-earnings ratio is 33.6 times, according to LSEG Datastream.S&P 500 IndexThe price-to-earnings ratio is 19.8 times.
“They’re entering the new year on a very high note,” said Matt Benkendorf, chief investment officer at Vontobel Quality Growth Boutique.
BMO Capital Markets strategist Brian Belski advises investors to “buy a little of everything” in the coming year because he “expects individual stock participation to expand significantly”; participation in 2023 will be relatively small compared to historical levels.
Others believe the Big Seven will continue to attract investors, anticipating a return to strength.
Francisco Bido, senior portfolio manager at F/m Investments, said the Big Seven areS&P 500 IndexTheir dominant position in equities means they are widely held by mutual funds and ETFs and may benefit as funds move from OTC funds to stocks.
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