Growing Concerns of Narrow Leadership
However, experts caution that this narrow focus on technology is atypical of early bull markets. Typically, broad leadership emerges as confidence in the economic outlook grows. Bernstein, formerly the chief investment strategist at Merrill Lynch, draws parallels with the late-1990s tech bubble, which holds valuable lessons for today’s investors.
This current market performance suggests that investors have become fixated on only “seven growth stories,” according to Bernstein. While these technological advances are indeed transformative, he reminds investors that those who purchased the tech-heavy Nasdaq at the peak of the 1990s bubble had to wait 14 years to break even.
Looking Beyond Technology
Amid the hype surrounding artificial intelligence and its potential to revolutionize the economy, investors often overlook other significant developments, such as the reshoring of supply chains. Bernstein believes that assets such as small-cap stocks, cyclicals, industrials, and non-U.S. stocks are poised to catch up and offer attractive investment opportunities.
Additionally, Bernstein emphasizes the importance of diversification and suggests focusing on “maximum diversification” to counter the historically narrow market of 2023. This involves rejecting concentrated positions in a few stocks and exploring a wider range of investment options.
Signs of a Broadening Market
While the market has been largely dominated by the Magnificent Seven, it is essential to note that these individual stocks are not the sole winners in 2023. Kevin Gordon, senior investment strategist at Charles Schwab, highlights that the significant contribution of these stocks to the S&P 500’s gains is primarily due to their massive market caps.
For instance, Apple Inc. may not be among the top-performing stocks at 49% gain, but its $3 trillion market cap makes it a substantial mover in the overall index. Therefore, the 2023 rally’s peculiarity lies not so much in the performance of megacap tech stocks but in the underperformance of the rest of the market until recently.
As economic uncertainty recedes and interest rates become clearer, there is hope that the rest of the market will catch up. The fears of a severe economic downturn have subsided, and the Federal Reserve has signaled its potential shift towards rate cuts in 2024, having likely finished raising rates.
While it was a brutal year for stock pickers who missed out on the few winners, experts like Gordon downplay the idea of a drastic shift where investors sell off megacap stocks to invest in the rest of the market. Instead, they anticipate a scenario where the rest of the market catches up without compromising the success of highfliers.