The stock market has seen a broadening beyond a handful of the largest stocks, but the Magnificent 7 continues to outperform year-to-date after a strong performance in 2023. This group includes Microsoft, Meta Platforms, Amazon, Apple, NVIDIA, Alphabet, and Tesla. Despite concerns about market concentration, the top ten companies now make up almost 34% of the total market capitalization of the S&P 500. However, this level of concentration has been higher in the past, and historical data shows that a concentrated market does not always lead to a sharp decline.
Momentum strategies have also played a significant role in the market’s performance, with stocks like the Magnificent 7 continuing to outperform. While past performance does not guarantee future results, momentum stocks have historically had positive returns 60% of the time. The S&P 500 also outperformed the average stock in 2023, indicating no inevitable decline in the next year. Historical data shows that the S&P 500 and momentum strategies have been higher 80% of the time in the following year, with median returns of 24.7% and 21.9%, respectively.
The current excitement around technology and artificial intelligence is not seen as analogous to the tech bubble, as the current large technology companies are highly profitable. However, the price paid for these companies will impact future expected returns. The upcoming monthly jobs report will be closely watched for any implications on the economy, wage pressures, and inflation. Federal Reserve Chair Powell’s rate-cut-friendly comments have increased market odds of a Fed easing in June, with expectations of three cuts of 25 basis points each in 2024.
While historical performance following a concentrated market does not argue for caution, investor sentiment may be a reason for concern. Optimism is currently high, which could lead to at least a pause in the market’s performance. It is crucial to ensure that your portfolio matches your risk tolerance and exercise caution on the margins. The first quarter of the earnings season will begin the following week, adding more puzzle pieces to the outlook for Fed rate cuts and overall market performance.
