The S&P 500 is up about 20% over just the last four months, surging well above the 5,000 mark. This rally has come even with 10-year Treasury yields back around 4.3% and investors paring back bets for Federal Reserve rate cuts this year from around 170 basis points to about 80 basis points today.
Big tech has played a big role. The so-called “Magnificent 7” contributed 60% of the S&P 500’s 26% return last year as AI enthusiasm exploded. Their surge has only continued this year. This has led some to lament that the stock market is its most concentrated since the 1970s. Some also fear that the AI hype is just all talk. Yet, strong earnings have shown big-tech companies to be worthy of their rallies. Consider this Q4 season: The Magnificent 7 have cleared a very high bar, beating earnings expectations by roughly 9% on average compared to 4.8% for the broader S&P 500. While AI may be one of the buzziest buzzwords around, the talk and the rally have been underlined by genuine profits.
Longer term, it’s also more than just tech that can benefit – companies across industries are making AI investments. As they continue to integrate AI into the fabric of day-to-day operations, we think real cost savings and sales generation are on the horizon.
But what’s not making new highs?
Not all markets are feeling the good vibes.
In some cases, this may be warranted. For instance, China’s stock market continues to hover around decade lows amid economic weakness, geopolitical tension, regulatory hurdles and questions around market-friendly policies. Foreign direct investment in China has fallen negative in recent quarters. Stimulus efforts are slowly taking effect, but more forceful measures are probably needed to become optimistic.
On the other hand, other pockets of the market stand to play catch-up. For instance, we see the potential for small- and mid-cap companies because the Russell 2000 remains more than 15% below its previous highs, as well as themes such as health care innovation and ongoing consumer resilience that could support recoveries in some areas going forward. Said another way, we think big tech can continue to climb and other segments of the market can also join. We think the key is to focus on high-quality earnings growth, and careful stock selection can help tap outperformance opportunities. The current environment looks like fertile ground for active equity managers.
Rick Barragan is the managing director, Los Angeles market manager for J.P. Morgan Private Bank.
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Source: J.P. Morgan Private Bank, February 23rd, 2024. “Record-breaking rallies: What does it mean for you?” By Madison Faller, Global Investment Strategist, and Matthew Landon, Global Investment Strategist, J.P. Morgan Private Bank.
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