This new bull market and the recent rally to close out 2023 was mostly driven by technology stocks, particularly the Magnificent Seven. These mega-cap tech giants consisting of Alphabet (GOOG , GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) powered the Nasdaq Composite, which soared 44% in 2023.
However, entering 2024 there were concerns as to whether this massive rally was sustainable, given what some pundits called “a lack of broader participation,” meaning that the rally was heavily concentrated by the Magnificent Seven. There was some credence to this notion, but on Friday, though the tech behemoths helped the S&P 500 index closed above 5,000 for the first time, these concerns were put to rest in my eyes.
The S&P 500 stocks are up 6% since the start of the year, while climbing 23% over the past 12 months. In securing its all-time high close above the 5,000 level Friday, much of the S&P 500’s gains have been driven by strong earnings and the forward guidance companies have provided thus far, particularly from the mega-cap names. The S&P 500 Technology sector gained roughly 3% for the week, adding onto a more than 10% gain so far this year.
In essence, the theme of the fourth-quarter earnings season has been the winners keep winning. But in securing the key 5,000 level, which it did after the index first crossed 4,000 in April 2021, there was broader participation. For some context, the average number of S&P 500 companies that have surpassed this quarter’s earnings estimates is trending slightly higher than the previous four quarters, helping drive sentiment. Even Nvidia (NVDA), which has yet to report earnings, jumped 3.6% on Friday.
With all three major averages notching their fifth straight winning week and 14th positive week in the last fifteen, there is now the concern whether market valuations are overstretched, meaning stocks are suddenly expensive again. There is also fear that the Magnificent Seven are hoarding all the gains. But consider this, when looking at the weekly performance of the S&P 500 sectors, eight out of the eleven sectors ended this week in positive territory, with Technology topping the gainers, while only Utilities, Consumer Staples and Energy were in the red.
For more context, if you look back since the market bottomed in Oct 12, 2022, the S&P 500 has gained almost 40%. While tech has indeed led the recovery, other sectors such as Materials, Industrials, Financials, and Consumer Discretionary have done well, gaining anywhere between 20% to 35%. This would seem to qualify as a broad bull market. While there are still some sectors lagging such as Energy and Utilities, it’s difficult to say that the current market rally is narrow.
However, the fact that the Magnificent Seven stocks have contributed so significantly to the market’s rally and the S&P 500’s critical milestone, is a concern and raises the question whether this is truly a new bull market. But as you can see from the improvement other sectors have made, there is broader participation than the narrative suggests. What’s more, there continues to be growing confidence in the economic outlook, along with more accommodative fiscal policy.
On Friday December’s revised inflation reading came in lower than first reported, meaning the prices consumers pay rose at an even slower pace than originally reported, coming in at an increase of 0.2% for the month, less than the originally reported 0.3%, according to the Labor Department’s Bureau of Labor Statistics. It’s a modest change to be sure, but it confirms that inflation was moderating, and can compel the Federal Reserve to start cutting interest rates later this year.
In other words, the market’s rally has more room to run. While the Magnificent Seven has indeed led the gains in the S&P 500 index, it doesn’t mean it will remain that way.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.