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Optimistic expectations about the economic future and the Federal Reserve's accommodative policies are motivating investors to broaden their investment horizons beyond the high-growth stocks and technology giants that have been the growth drivers of the U.S. stock market in the past year.
While stocks such as Nvidia (NVDA.O) and Meta Platforms (META.O) have been key drivers of market growth in 2024, the financials (.SPSY), manufacturing (.SPLRCI) and energy (.SPNY) sectors have also outperformed the S&P 500 Index, rising 9.7% YTD. This eases concerns that the market is becoming overly dependent on the success of a limited number of stocks.
Next week, investors' attention will turn to Friday's Personal Consumption Expenditures Cost Index, which promises to provide an update on inflation. In addition, the end of the first quarter could trigger market volatility as investment fund managers adjust their portfolios.
The current surge in market activity contrasts with last year, when uncertainty about the economic outlook led investors to seek protection in the stocks of the so-called "Magnificent Seven" - companies with the largest market capitalizations that were attracted by their leading market positions and strong financial reports.
Last year, the sectors dominated by large-cap companies - technology (.SPLRCT), communication services (.SPLRCL) and consumer staples (.SPLRCD) - outperformed the S&P 500 Index, rising 24%.
This year, the financial and industrial sectors have posted gains of 10.1% and 9.9%, respectively, while the energy sector has gained 10.3%.
In a broader context, a group of seven major companies - Apple (AAPL.O), Nvidia (NVDA.O), Alphabet (GOOGL.O), Tesla (TSLA.O), Microsoft (MSFT.O), Meta Platforms (META.O) and Amazon.com (AMZN.O) - have underpinned 40% of the S&P 500 Index's gains so far this year, according to analysis from S&P Dow Jones Indices. By comparison, their contribution was more than 60% in the prior year.
The explosive interest in artificial intelligence has led to an impressive 90% increase in Nvidia's share price this year, while Microsoft registered a 14.5% gain. At the same time, Apple and Tesla's share prices have shown a decline of 11% and 32% respectively over the same period.
Apple faced an additional hurdle this week when the U.S. Justice Department accused the company of monopolizing the smartphone market, raising questions about regulatory risks that could make investors uneasy about investing in large tech firms.
Evidence of the broadening market interest is the increase in the number of S&P 500 stocks that have outperformed the benchmark index, from 150 last year to 180 this year, as of last Thursday.
The S&P 500 Index was little changed on Friday, but recorded its biggest weekly gain for 2024. That followed the Federal Reserve's announcements this week of a projected three interest rate cuts by the end of the year.
The Nasdaq rose slightly, similar to the Semiconductor Index (.SOX), which also posted significant gains for the week thanks to sustained enthusiasm for artificial intelligence. The Dow Jones index, on the other hand, closed lower.
On the same day, stocks from the consumer staples sector experienced declines. Shares of Nike (NKE.N) lost 6.9% after the world's largest sportswear maker warned of a possible low single-digit percentage decline in revenue in the first half of fiscal 2025.
Shares of Lululemon Athletica (LULU.O) fell 15.8% as the company predicted full-year revenues and profits below expectations.
Earlier this week, despite leaving rates unchanged, the Federal Reserve confirmed its intention to make three rate cuts this year.
"The market interpreted this as a signal that the Federal Reserve is no longer a threat and will eventually become supportive," commented Matt Stuckey, chief investment officer at Northwestern Mutual Wealth Management Company.
According to CME's FedWatch Tool, investors now rate the probability of the first rate cut in June at 71%, up from 56% earlier in the week.
The Dow Jones Industrial Average (.DJI) lost 305.47 points or 0.77% to close at 39,475.90, the S&P 500 Index (.SPX) fell 7.35 points or 0.14% to 5,234.18, while the Nasdaq Composite Index (.IXIC) rose 26.98 points or 0.16% to 16,428.82.
For the week, the S&P 500 added 2.3%, the largest weekly percentage gain since mid-December. The Dow index gained 2%, posting its biggest weekly gain since mid-December, and the Nasdaq climbed 2.9%, its biggest weekly percentage increase since mid-January.
Among the growth leaders, FedEx (FDX.N) shares soared 7.4% a day after the company beat Wall Street's quarterly forecasts.
Meanwhile, Digital World Acquisition's (DWAC.O) share price fell 13.7% after its shareholders decided to approve a merger with a media-tech company linked to former U.S. President Donald Trump. Trading volume on U.S. exchanges reached 9.45 billion shares, well below the average of 12.34 billion over the past 20 trading sessions.
Despite some growth, some segments of the market, particularly small-capitalization companies, continue to struggle. The Russell 2000 Small Company Index (.RUT) is up just 2.2% YTD.
Some investors believe this category of companies can expect support in light of the latest outlook from the Federal Reserve, which reiterated its plan to cut interest rates by 25 basis points three times this year despite an increase in projected economic growth from the central bank.
"As the Federal Reserve begins to cut interest rates, we're seeing increased liquidity and easier financing," said Jack Ablin, chief investment officer at Cresset Capital. "Who benefits the most from this? Not large-capitalized companies with their fail-safe access to capital in any environment, but rather smaller and lesser-known businesses."
This process of market diversification could face hurdles if the economy enters a period of instability or overheating, casting doubt on the so-called "golden mean theory" that has supported market indexes of late.
Some investors suggest that the current market rebound, which has seen the S&P 500 Index rise 27% since the end of October, may soon experience a correction.
At the same time, other analysts are confident that the current trends will continue. Peter Tooze, president of Chase Investment Counsel, shared that his firm recently invested in shares of Goldman Sachs (GS.N) and oilfield services company Tidewater (TDW.N), while reducing stakes in large-capitalized companies, including selling shares of Apple.
"The market is becoming more diverse," he says. "There are more opportunities to make money this year than there have been in the past."
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