A strong start to 2024
The S&P500 is up 10 per cent in the first quarter of calendar 2024. Another useless fact is that the S&P 500’s rally set 22 new records in 2024 alone, and its market value has grown by over U.S.$9 trillion since late October.
It’s worth reflecting on our prediction from last year that innovative growth stocks would outperform mega-cap tech stocks in 2024 as investors broadened their risk appetite to include small caps.
The first quarter has aligned with our forecasts, with the combination of disinflation and positive economic growth proving beneficial for equities. We also anticipated smaller listed innovators would start to catch up with the ‘Magnificent Seven’ and thereby outperform them.
With that reflection complete, it’s more appropriate to look ahead to the remaining quarters of 2024. I believe the rally will likely continue making it a rewarding time for equity investors.
The excitement surrounding the ‘Magnificent Seven’ stocks in aggregate seems to be waning while the broader market continues its upward trajectory. While Apple (NASDAQ:AAPL) experienced an 11 per cent decline in the first quarter, and (NASDAQ:TSLA) Tesla saw a nearly 30 per cent slump in the same period, Alphabet (NASDAQ:GOOG) managed to recover towards the quarter’s end, ultimately achieving an eight per cent gain. The remaining four tech giants, Nvidia (NASDAQ:NVDA), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), have continued to fly the flag for mega-cap innovators, earning a new moniker, the “Fab Four.” These labels are obviously and clearly meaningless, given they aggregate any group of stocks that are doing well.
As an aside, Nvidia has again emerged as a standout for the first quarter, with demand for AI computing power driving its shares up by over 85 per cent. This builds on the 238 per cent gain in 2023, which made it an understandable favourite among individual investors. And despite its recent gains, Nvidia is now trading at 35 times its projected earnings, down from a peak of 62 times.
Perhaps more important, however, for the sustainability of the rally is the broadening of performance to include almost all sectors of the S&P 500. While the “Fab Four” have driven nearly half of the S&P 500’s first-quarter growth, small caps, industrials, and financial services have all turned in commendable performances, and the deepening breadth should fuel optimism for a more sustained market rally.
This is because, in contrast to last year or the year before – where weaknesses in the ‘Magnificent Seven’ would have significantly impacted the broader market – a new narrative is emerging. Tesla faces challenges from Chinese competitors and slower growth, while Apple is grappling with legal and regulatory pressures, alongside concerns over its position in the AI wave. And yet, the rest of the market is holding up, or indeed performing commendably.
The market’s resilience is partly fueled by a switch from pessimism about a recession to optimism that the economy will land ‘softly’ and the Federal Reserve will cut interest rates. To a lesser extent, the burgeoning interest in artificial intelligence has injected enthusiasm into the market. However, remember that the current backdrop of disinflation and positive economic growth, even if anemic, has proven positive for innovators since the 1970s.
That backdrop remains in place, and with the caveat that all bets are off if inflation becomes resurgent, I am of the view the market should do well, at least until 2026, when much of the re-adoption of risk will have rolled out, and a reappraisal of the outlook will be required.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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