2nd Quarter 2024.
Market Review
Performance Driver Review
Market Perspectives
The stock market is always quite the ride. Since ringing in the fateful new year in 2020, investors have experienced a great deal of volatility due to the pandemic, government stimulus, rate moves at the Federal Reserve and a few different market themes.
Today, investors sit at a new market high. Focusing on the S&P 500, the widely followed index finished the quarter just under 5,500 points – 53% higher than the 2022 low induced by rapid Federal Funds Rate hikes and a whopping 144% above the March 2020 bottom. Those who stayed invested throughout this volatility have been rewarded handsomely with significantly higher portfolio values.
This market performance has been driven both by earnings growth during the noted performance period and by the expectation of earnings growth potential in the future. From Q1 2020 to Q2 2024, companies in the S&P 500 have grown their earnings per share by 38%. Additionally, the expectation for future earnings growth has also improved, evident in the S&P 500’s P/E multiple growing from a pessimistic 17x to a much more optimistic 26x over the same period.1
What drove markets to this point?
As noted earlier, several different factors have played a role in market performance over the last few years; but, more recently, a dominant theme has taken hold and fueled much of the recent market rally – concentration.
Around the beginning of 2023, seven stocks took off like a rocket, leaving most of the market in the dust. Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta and Tesla all began a tremendous performance streak as investors bet they would be dramatic benefactors of advancement in the Aritical Intelligence industry. For 2023, the “Magnificent 7” stocks listed above returned 76% on average while the rest of the S&P 500 returned an average of only 8%. The year-to-date story for 2024 has been quite similar with the “Magnificent 7” up 33% on average and the balance of the index averaging just 5%.
The real power in the influence of these few stocks exists in the fact that they make up an increasingly large portion of the index itself. These seven stocks alone made up over a third of the entire S&P 500 as of quarter-end; therefore, even when the other 493 companies are going a different direction, the concentration of the “Magnificent 7” has been able to dramatically affect the index’s return. This concept of a handful of stocks driving much of the return of the broader market is known as a “narrow market,” and narrow markets often come with their own set of risks and opportunities.
What are the implications of new highs and narrow markets for an investment portfolio?
As is often the case, speaking with surety about what new highs and narrow markets mean for the performance of a client’s investment portfolio is difficult as these market dynamics alone are generally not enough to force future market moves.
For instance, clients hear the words “all-time highs” and immediately think the market must be overvalued and ripe for a downturn. While past market selloffs have of course been preceded by what was at the time an all-time-high, such as the Dotcom bubble bursting after a March 2000 all-time-high or the housing bubble bursting after an October 2007 all-time-high, there are plenty of all-time-highs that become new market floors as the market continues to rise. As an example, the S&P 500 has hit 31 new highs in 2024 alone. When extending the timeline back to the 1950s, all-time-highs have become a new market floor over 30% of the time.2 All-time-highs alone do not predict the future performance of an investment portfolio.
To evaluate the narrow market conversation, look at market performance during periods when market concentrations were increasing or decreasing to categorize whether or not the current narrowness could affect an investor’s portfolio. To ease in the comparison of time periods, it is best to use the concentration of the top ten stocks in the index as opposed to the top seven. Since 1950, the top 10 stocks in the S&P 500 have made up as much as over 30% of the index (as is the case now) or as little as below 15% of the index. The index has moved from peak to trough concentrations five different times over that nearly 75-year history.3 The key takeaway from all of those cycles is that the index return over both periods of rising concentrations as well as falling concentrations has historically been positive. Generally, this should indicate to investors that market concentrations alone also have no real predictive implications for the future performance of portfolios.
In Summary
Markets are high, markets are narrow – historically, that has not meant that investors should be concerned over the state of their investment portfolio as long as they are paying attention to two key things: diversification and an appropriate asset allocation.
Diversification, in this case, means owning a portfolio that is spread reasonably across a selection of strong managers or quality companies. Doing so ensures an investor is not overly tilted towards the performance of a single company or set of companies. An appropriate asset allocation means having a portfolio that is invested with a risk profile that matches the investor’s ability and willingness to take risk. By remaining disciplined with respect to these couple key investing pillars, an investor can weather all market levels and concentrations. As always, we thank you for your trust and look forward to our meetings with you in the near future.
1The P/E multiple, or price-to-earnings multiple, is the current share price of a stock divided by its earnings per share over the last twelve months. The higher the P/E multiple, the more an investor is paying for their portion of future earnings. Typically, an investor is willing to pay more for future earnings if they expect the level of future earnings to be significantly higher than today’s earnings, i.e. the investor expects the company to grow.
2Source: JPMorgan Asset Management, June 30, 2024 Guide to the Markets – Market floor is defined as an all-time-high from which the market never fell more than 5%.
3Source: Morgan Stanley, Counterpoint Global Insights: Stock Market Concentration – How Much Is Too Much?
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