It’s said that history may not repeat itself, but it often rhymes. That may be true for 2024, if U.S. equities continue to outperform—though they might not see as sizable gains as they have notched this year.
Stocks have had a great few weeks, giving investors plenty to be grateful for going into the Thanksgiving holiday. The
S&P 500
is up more than 8% in November alone and the Nasdaq Composite is up 11% month to date, through Nov. 23.
Of course, that’s no surprise to anyone who has been paying attention to the pace of gains for the Magnificent Seven big tech stocks this year. Those seven—namely Apple (ticker: AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)—have been responsible for nearly all of the stock market’s gains in 2023.
The narrow winners’ circle has some investors worried about this so-called bad breadth—in other words, the year’s gains being spread out among a relatively small number of stocks. With the Magnificent Seven accounting for well over a quarter of the S&P 500’s market capitalization, the index’s rally has continued on the back of their strength—and the Nasdaq’s has, too.
In fact, that strength looks even more impressive on a global scale, writes Capital Economics Market Economist Hubert de Barochez. While the MSCI USA index has jumped almost 20% this year, the MSCI All Country World Index excluding the US (MSCI ACWI ex-USA) is up only about 7%, he notes.
Once again, that’s largely down to the sectors that contain the Magnificent Seven stocks: Consumer Discretionary, Information Technology (IT), and Communication Services, he notes.
In fact, when it comes to other sectors, equities in the rest of the world performed similarly, or even a bit better, than those in the U.S., de Barochez writes.
The disparity is even more obvious at MSCI’s industry group level. Software & Services, Semiconductors & Semiconductor Equipment, Media & Entertainment, and Technology Hardware & Equipment alone “have contributed to more than three-quarters of the total near-20% increase in the MSCI USA Index,” according to de Barochez.
Getting even more specific, the performance of automobiles, interactive media, semiconductors, software, and technology hardware stocks clearly stand out in the U.S., but not in the rest of the world, he writes.
That outperformance isn’t all just hype. Recent earnings reports from a number of players have shown that the fundamentals behind U.S. tech companies appear strong, leading earnings estimates for these companies higher—along with valuations.
The upshot to all this, de Barochez argues is that “U.S. stock market will keep outperforming in the next couple of years.”
Recent gains have put fresh wind in the bulls’ sails. Last week, Yardeni Research President Ed Yardeni argued that the S&P 500’s July record high could be eclipsed in the next year.
Fundstrat’s Head of Research Tom Lee likewise reiterated last week that his “base case remains for a year-end rally.” He sees room for the Federal Reserve to be more dovish in December, as coming inflation readings should support the case that the Central Bank can cease raising interest rates, which would cheer the market.
For his part, de Barochez doesn’t see an entirely rosy outlook. His firm predicts the U.S. economy will falter, a departure from the soft-landing narrative that has dominated the stock market in recent months.
Yet that doesn’t change the economist’s thesis the U.S. stock market will keep outperforming. To wit, he thinks that a U.S. slowdown will weigh on global equities as well. Perhaps more important, he says a downturn will be relatively mild and brief in duration—and in turn, unlikely to weigh on the Magnificent Seven much.
“So while the overall stock market might not make more ground in the near term, U.S. tech stocks might continue to outperform,” he concludes. “Further ahead, we think that growing enthusiasm about artificial intelligence will mean that Big Tech equities, and in turn the U.S. stock market, keep outperforming. After all, the U.S. is best-placed in the AI race.”
Taken all together, it wouldn’t be surprising if tech and the broader market had to take some lumps in 2024; it seems hard to envision a scenario in which the S&P 500 approaches nearly 20% returns for the year, as it is in 2023. Still, even if U.S. stock don’t notch double-digit percent gains in 2024, they still might stay ahead of the rest.
Write to Teresa Rivas at teresa.rivas@barrons.com
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