It’s The Same Old Story
Everywhere I go, I get slandered, libeled
I hear words I never heard in the Bible
And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied, satisfied” – Paul Simon
We have not quite reached the finish line, but it is abundantly clear that 2024 will effectively be a repeat of 2023. The stock market remains dominated by mega-cap tech/AI stocks. The chart below shows the market capitalization of the Magnificent 7 (the mega-cap tech stocks – blue line) and the remaining “S&P 493” (green line).
Like 2023, those seven mega-cap tech stocks determined if you had a good year or not. If you invested almost anywhere else, it would be a mediocre year, at best. The pandemic tech bubble popped in 2022, but the introduction of regenerative AI has been re-inflating the tech sector ever since. With apologies to Sir Winston Churchill, one of my favorite historical figures; in 2024, never was so much, owed by so many, to so few.
Can we have a three-peat in 2025? If there is one thing we’ve learned in all our years as market observers, you never say never. What has happened in 2024 was considered a very unlikely event a year ago, but here we are.
A look at the chart below shows that the forward P/E ratio of the Magnificent 7 is clearly elevated relative to the remainder of the S&P 500 (chart below), but it isn’t anywhere close to the levels seen at the end of 2021. Who’s to say a three-peat can’t happen? Investors simply can’t ignore the meg-cap tech stocks.
Nonetheless, after two magnificent years, our bias is to be underweight the Magnificent 7 in 2025. Our rationale is that forward earnings growth for the other 493 stocks is accelerating, while the earnings growth rate for the meg-cap tech is decelerating (chart below). Yes, earnings growth is higher than the other 493, but that appears to be amply reflected in stock prices already. We lean toward 2025 being a catch-up year for the rest of the market.
Happy New Year to All!
What We’re Reading
Class-Action Suit Says You’re Overpaying for Apple iCloud Storage
The Fed Reduced the Short-Term Rate Again, but Interest Costs Remain High
10-year Treasury yield rises, hovering near a seven-month high
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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Past performance is no guarantee of future returns.
Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy will be profitable.
AI, Artificial Intelligence, Earnings, Earnings Growth, Magnificent 7, mega cap technology, S&P 493By: Adam
