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1st Quarter 2024: The Magnificent 7 The Magnificent 4

1st Quarter 2024: The Magnificent 7 The Magnificent 4

April 01, 2024

The S&P 500 gained 10% during the first quarter of 2024 and continues to expand its bull market gains. Since the current bull market began on October 12, 2022, the S&P 500 has risen 47% off that trough. In my 4th Quarter 2023 review I highlighted the nuances between an equal-weighted version of the S&P 500 (RSP) versus the actual, market-capitalization weighted, version (SPY). The theory behind comparing the two is there will be evidence of a broad-based market rally when RSP is moving in line with SPY. Conversely, if there is greater divergence between the two, this supports the view that only the largest stocks are leading that way. The latter was very much the case in 2023, but over the last six months, that divergence has narrowed significantly. This illustrates a scenario where a rising tide is lifting all ships, or the rally has evolved to being more broad-based.

SPY vs RSP: 2023

SPY vs RSP: Last 6 Months

Source: www.composer.trader

It took the S&P 500 only 12 trading days in 2024 to finally take out the previous closing high from January 3, 2022. In total, this represents 513 trading days for a new market high to be recorded. Since eclipsing 2022’s high-water mark, the S&P 500 has recorded 22 additional record highs in 2024 alone. It is presently 9.54% above the January 2022 high.

Source: Yahoo Finance

Dissecting the Mag 7
The Magnificent 7 will go down in history as the theme for 2023. From the press to pundit commentary, and the excess returns in these seven names, there wasn’t much else to talk about in 2023. Interestingly, these names have gone by a number of catchy monikers over the years since CNBC personality, Jim Cramer, coined the term FANG in 2013 to refer to Facebook, Amazon, Netflix, and Google. In 2017, this term expanded to FAANG, to account for Apple. When Google renamed itself to Alphabet in 2015 (although since 2015 it is still commonly referred to as Google), Netflix fell out of favor in 2019 with subpar performance, Microsoft was added in 2019, and Facebook renamed itself to Meta in 2021, there was a pivot to MAMAA (Meta, Amazon, Microsoft, Apple, and Alphabet) in 2021. There were some less catchy variations along the way too, that I will spare you from. In 2023, most of these names were reintroduced as the Magnificent 7, a term that has been attributed to Bank of America chief investment strategist, Michael Hartnett who acknowledges being a fan of the 1960s Western, The Magnificent Seven. The Magnificent 7 includes all of the MAMAA names and adds Tesla (TSLA) and NVIDIA (NVDA). And while four of those names continue to rally on, the other three underperformed the S&P 500 in the first quarter of 2024.

                                                

Source: MarketWatch and Yahoo Finance.

Given the strong performance of these seven names last year, there has been a good deal of analysis around how large they have become within the S&P 500 index. Of note, if one were to combine the value of the seven stocks in the Magnificent 7 their combined value would be equal to the second-largest stock market in the world. Obviously, the US stock market is the largest, but the size of these companies is staggering when viewed through that lens. And it shouldn’t be lost on investors how top heavy the S&P 500 currently is, as this data suggests. Going back through history, we have to go back to the 1970s to see a period when the top 10 stocks in the S&P 500 carried a larger weight, or concentration, than they do now (TMT = technology, media, and telecomm & GFC = Great  Financial Crisis).

Source: JPMorgan. Data through January 31, 2024.

One thing is certain, rotation has existed throughout history and will likely continue. The list below highlights the top 10 largest companies in the US, by market capitalization (or size), for each decade since  1980. None of the companies that are on today’s top 10 list were in that position in 1980 or 1990. Additionally, the data suggests that the US market has become more heavily weighted in technology over  the decades, with AI (artificial intelligence) being all the buzz of late. Who knows what new companies might come out of the AI revolution we are in the midst of.

Source: S&P, Russell Investments.

The Fed Pivot
The inflation battle and future direction of interest rates remains one of the main themes of 2024. At the conclusion of 2023, the market was looking for seven rates cuts in 2024 while the FOMC was forecasting three. This dispersion has closed substantially in the first three months of the year and the two data points are nearly aligned with only a 12 bps (0.12%) separating them vs one full percent  to start the year.

Source: JPMorgan.


The FOMC continues to monitor inflation and believes they can be more patient with the first rate cut. While inflation has continued to move lower, it is not doing so at the previous speed at which it had last year. The FOMC’s preferred metric of inflation is PCE Core, which they would like to see in the 2% range. The last reading on that was the January 2024 figure at 2.4%. The chart below provides data on two measures of inflation, CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures). Both are moving lower and closing in on values that would encourage the FOMC to make their first cut. I still believe this will be the headline in the second half of the year.


Source: JPMorgan.

Resilience of the US Economy
Reviewing the published reports from The Conference Board just one year ago they state (March 2023). “Unseasonably warm weather boosted economic activity in January, but several February indicators suggest that the economy will continue to soften. The collapse of Silicon Valley Bank has triggered alarm about financial stability.” Even if one were to go back to their report November 2023, there was still calls for a recession, “While the prospects for a ‘soft landing’ have risen, The Conference Board believes it is more probable that the US economy will slip into a short and shallow recession in early 2024.” Finally, The Conference Board has removed the word recession from their forecast but still paint a rather lackluster outlook with their March 21, 2024 report. “The US economy entered 2024 on strong footing. Various indicators of business activity, labor markets, sentiment, and inflation have generally been moving in a favorable direction. However, headwinds including rising consumer debt and elevated interest rates will weigh on economic growth. While we no longer forecast a recession in 2024, we do expect consumer spending growth to cool and for overall GDP growth to slow to under 1% over Q2 and Q3 2024. Thereafter, inflation and interest rates should normalize and quarterly annualized GDP growth should converge toward its potential of near 2 percent in 2025.”

The strength of the US economy has continued to surprise to the upside and show more resilience than has been forecasted. On the last GDP print, all contributors to GDP have reported positive data, except for private inventories, which was only a slightly negative. Fourth quarter 2023 GDP was 3.2% which is indicative of a strong economy. 


Source: JPMorgan.

Where Do We Go from Here?
Taking another data point from my 4th quarter missive, the final portion of that piece focused on the various strategists’ S&P 500 forecasts for 2024. Oppenheimer led the way with a 2024 year-end forecast of 5,200 and they were one of the nine that had a positive forecast for the S&P 500 in 2024. There were five more that thought the market would be lower this year, with JPMorgan at the back of the pack forecasting 4,200 at year-end. Today the S&P 500 closed at 5,254. Since those targets have been released, six strategists have increased their 2024 full-year forecasts. JPMorgan remains at 4,200 while Oppenheimer increased their target to 5,500. Yet only five strategists have targets higher than where the market is currently trading. 

In closing, the S&P 500 just registered its strongest quarter since 2019. There have been 11 instances where the market has registered a first quarter performance of 10% or greater. 10 out of those 11 instances resulted in additional gains through the end of the year. On average, 91% of the instances were higher and the market saw an additional gain of 6.5% to year-end.

If you have any questions or would like to discuss your personal circumstances, please do not hesitate to reach out to me.

Feel free to schedule a quick 15-minute coffee chat with me.


Rob Leiphart, CFP®
203-220-6474
rleiphart@rbcapitalmanagement.com