A dovish Federal Reserve and a comforting economic outlook are prompting investors to look beyond enormous growth and technology stocks that have driven the U.S. stock market's gains over the past year. Though Nvidia (NVDA.O) and Meta Platforms (META.O) have been the market's main drivers in 2024, financials (.SPSY), industrials (.SPLRCI), and energy (.SPNY) are outperforming the S&P 500's 9.7% year-to-date gain.
That calmed concerns that the market was growing too dependent on a few stocks. Investors are looking outside megacaps for winners as they expect the economy to survive while inflation falls. The Fed indicated confidence it could control inflation and decrease interest rates this year, even as it upgraded its prediction for U.S. economic growth, earlier this week.
"There is more confidence that the Fed can get inflation approaching their longer-term targets without a recession," said Citi's head of U.S. equity strategy, Scott Chronert, who favors technology, financial, and industrial stocks. “You'll feel more comfortable owning a bank or industrial if you think the Fed will lower rates.”
Next week, investors will await Friday's personal consumption expenditures price index for inflation updates. Fund managers may modify their portfolios at the end of the first quarter, causing volatility. Last year, investors sought refuge in the Magnificent Seven group of megacap stocks, enticed by their dominant industry positions and robust balance sheets, due to economic uncertainty.
The S&P 500 gained 24% last year, but only megacap sectors like tech (.SPLRCT), communication services (.SPLRCL), and consumer discretionary (.SPLRCD) outperformed. According to S&P Dow Jones Indices, the Magnificent Seven—Apple (AAPL.O), Nvidia (NVDA.O), Alphabet (GOOGL.O), Tesla (TSLA.O), Microsoft (MSFT.O), Meta Platforms (META.O), and Amazon.com (AMZN.O)—accounted for 40% of the S&P 500's gain as of Thursday. This compares to almost 60% last year.
A wider rally "means that leadership isn't so concentrated and susceptible to a correction," said Dakota Wealth senior portfolio manager Robert Pavlik. After the Magnificent Seven all made significant gains in 2023, their performance has differed more this year, providing investors another reason to look at the market.
Nvidia shares have increased 90% this year due to AI enthusiasm, whereas Microsoft shares have gained 14.5%. Apple and Tesla, on the other hand, are down 11% and 32% this year. This week, the Department of Justice accused Apple of monopolizing the smartphone market, underscoring regulatory dangers that may deter investors from Big Tech. In another hint of broadening, 180 S&P 500 equities outperformed the benchmark as of Thursday, up from 150 last year.
After the S&P 500 gained 27% since late October, some investors expect a market drop. Others predict the tendency will continue. Chase Investment Counsel president Peter Tuz said his firm had bought Goldman Sachs (GS.N) and Tidewater (TDW.N) shares while cutting its megacap holdings, including dumping its Apple stake. He claimed "the market is broadening out". "You're just seeing that there's more ways to make money this year than the Mag 7."
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