2023 will likely be remembered as the year the Magnificent Seven big tech stocks did so much to fuel gains in the
S&P 500,
but shares of many more companies joined the party during November’s rally.
That could be a preview of what 2024 will be like. Strategists at a number of firms have advice on how to get ready.
The Magnificent Seven—Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla—are up some 70% since the start of the year. The group accounts for more than a quarter of the S&P 500, which is weighted according to market capitalization, so it has driven much of the index’s 24% 2023 rise.
While that small cohort of champions made some strategists nervous about the outlook for the rally, the winner’s circle expanded during last month’s surge. By the week before Thanksgiving, some 90% of S&P 500 components were above their 20-day moving averages.
The fact that more stocks are moving higher is intuitively good news for the rally. And as Ed Clissold, chief U.S. strategist at Ned Davis Research, wrote, a so-called breadth thrust, “or an extremely high percentage of stocks rallying together…is how many sustainable rallies begin.”
Over the past six weeks, the market has seen five such signals that the rally is broadening. Clissold cited the percentage of stocks that are at 20-day new highs, the 10-day average of advances over advances plus declines, five-day advances/ five-day declines, advancing volume versus declining volume, and the five-week total of advances minus declines.
As Clissold explains, getting to a new market high is a process. If breadth falls when stocks pull back and doesn’t expand enough in subsequent upturns, then the market rally fizzles out as gains depend on fewer and fewer stocks.
The good news is that as of last week, Ned Davis’s Big Mo Tape, which measures the percentage of subindustries in uptrends, hit 80%. That put it back in the bullish zone with one of its highest readings in the past decade. Any result above 79% is generally considered a positive sign.)
As Clissold wrote, the percentage of stocks above their 50-day moving averages rose as high as 87.8% on Thursday before slipping to 85.8% on Friday. The percentage of stocks above their 200-day moving averages climbed as high as 75.1% on Thursday and finished the week at 72.2%.
He says that while the market could slip in early 2024, given its recent gains, the pain likely won’t last. The “long-term breadth confirmation suggests the more likely scenario is that a pullback that relieves short-term excesses sets the stage for another bull market up leg in 2024,” he wrote.
Looking beyond the Magnificent Seven is also Richard Bernstein Advisors’ big advice for investors in 2024. “The idea that there are only seven growth opportunities throughout the entire global equity market is categorically wrong, and our portfolios are fully embracing the broad range of attractive investments investors appear to be ignoring,” the firm wrote this week.
Bernstein makes much the same point as Clissold, that healthy bull markets tend to have broad leadership because a strong economy aids lots of companies. But it warns that though more stocks were rising in the fourth quarter, the year-to-date gains still depend on relatively few companies.
The firm is concerned that the Magnificent Seven’s big gains may have encouraged investors to allocate their money toward parts of the market that have already taken off. The problem, it said, is that few investors can tell when momentum-based rallies will end. “It is exactly that uncertainty that calls for maximum diversification from today’s narrow market,” Bernstein said in a research note.
Bernstein likens the current fervor over artificial intelligence to the “new economy” touted before the tech bubble in the late 1990s. While the internet did indeed wind up changing the world economy, tech stocks didn’t immediately reap the gains bulls expected them to in 1999, leading to a so-called lost decade for those shares.
Put another way, the risk is that while AI may prove worthy of the hype, it may not bring tech shares along for the ride.
Only three of the Magnificent Seven stocks showed up when Bernstein screened for companies in the Group of Seven markets—the U.S., Canada, U.K., France, Germany, Italy, and Japan—that are currently forecast to have earnings growth of 25% or more. Those three ranked 52nd, 159th, and 162nd out of the 169 companies that made the cut.
Bernstein declined to name them, saying that as a macro-focused, top-down firm, it doesn’t usually name individual companies.
Yet even if the Magnificent Seven don’t remain market leaders, that doesn’t mean other stocks won’t see impressive gains. Many other sectors, including energy, consumer staples, and materials, made significant gains while tech languished during the post-bubble lost decade.
Bernstein thinks in 2024, investors should look to U.S. small-caps and cyclical stocks; industrial shares; and international stocks, particularly in emerging markets. “Like the opportunities after the Technology Bubble, there seem to be plenty of attractive investments,” the firm wrote. “They just aren’t in the seven stocks that are investors’ favorites.”
Royce Investment Partners is also excited about small-caps for next year, saying some companies in the sector stand to benefit from the same factors that are aiding the Magnificent Seven, but with more attractive valuations. The balance of risk and potential rewards for those companies, which portfolio manager Lauren Romeo called “high-quality unsung heroes,” seems more appealing than for the top tech companies, Romeo wrote.
It wouldn’t hurt to look beyond Big Tech for potential winners in 2024. The more the merrier.
Write to Teresa Rivas at [email protected]
Read the full article here