The S&P 500, the heavyweight index of the U.S. stock market, has continued its upward trajectory and is now on the brink of reaching the significant milestone of 5,000 points. In just over five weeks into the new year, investors have already witnessed substantial gains of nearly 5%. While this impressive start has led some strategists to believe that a market pause might be imminent, even the skeptics remain cautiously optimistic.
What sets this recent rally apart is that it no longer solely relies on the success of the Magnificent Seven big tech companies. As the market continues to thrive, new winners are emerging outside of this elite group. This presents a golden opportunity for stockpickers who may have been left behind during the broader market’s remarkable 22% surge over the past year.
One factor contributing to concerns about a potential decline or pause in the rally is the market’s notable volatility since the Federal Reserve’s December policy meeting. This volatility, as noted by Julian Emanuel, Evercore ISI’s chief equity strategist, is “an extremely rare combination, only twice seen since Y2K.” He attributes this pattern to previous selloffs in early 2018 and mid-2020, suggesting that a similar correction may be on the horizon. However, Emanuel also highlights that these prior selloffs presented opportunities for savvy investors to make profitable purchases.
Despite these cautionary notes, there are reasons to remain optimistic. Several strategists have even projected that the S&P 500 will continue its upward climb well beyond the 5,000 mark. The rally’s dynamics have shifted since early last year when it was primarily driven by the Magnificent Seven companies. Now, within this group of Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, there is a divergence in performance. Additionally, other stocks are also finding their footing and contributing to the market’s overall success.
The current earnings season has further exemplified the individuality within the tech sector. Companies reporting their results are experiencing varied reactions from investors, even within this specific industry. Concerns surrounding Alphabet’s results temporarily dampened sentiments, but positive outcomes from both Amazon and Meta quickly reversed this sentiment. However, further exemplifying the market’s volatility, Snap subsequently suffered a significant loss of approximately one-third of its value.
In summary, the stock market landscape is evolving, with new winners emerging alongside the familiar tech giants. While a potential market pause or decline could occur due to prevailing volatility, history suggests that such corrections can present attractive investment opportunities. As the rally progresses, diverse individual stock performances contribute to the overall market’s strength. Observers predict that the S&P 500 may continue to soar beyond the 5,000 mark, ushering in a new era of investment possibilities.
Market Divergence: A New Perspective on Big Tech
Amidst the fears of many investors, the relationship between big tech and the broader market has proven to be far from tightly correlated. In fact, it has been more accurately described as a “market of stocks,” as stated by Emanuel, a leading market analyst.
Charles Gave, the founder of Gavekal Research, shares an intriguing insight on this phenomenon. While it may be tempting to assume that the dominance of big U.S. tech companies will persist indefinitely based on recent trends, Gave argues that this assumption lacks a solid foundation. It is interesting to note that the U.S. stock market currently represents about 70% of the world stock market value, even though the U.S. gross domestic product accounts for less than 18% of the global total.
Gave views this as an obvious mismatch that will inevitably correct itself, posing a potential risk for those who have abandoned stock-picking in favor of index investing. He suggests that it might be wise for investors to reconsider the usual suspects and explore opportunities beyond the tech sector.
This sentiment is echoed by other market strategists. Barry Bannister, Stifel’s Chief Equity Strategist, shares a similar cautionary outlook on the S&P 500 but believes that investors who venture into sectors outside of tech can still find attractive prospects.
Late last year, Allspring Global Investments and Richard Bernstein Advisors also highlighted the importance of diversification. They emphasized that stocks that were previously overlooked, such as small- and mid-cap companies, have the potential to shine.
Looking ahead to 2024, if the rally stalls while the list of winning stocks continues to grow, stockpickers may find themselves in a more favorable position. However, it is worth noting that buying the index remains a reliable and low-maintenance option for long-term investors.
In conclusion, market divergence has become a prominent feature, challenging the belief that big tech will remain supreme indefinitely. Considering alternative sectors and embracing diversification may prove to be key strategies for investors seeking to navigate the evolving landscape of the stock market.