Last year’s stock market rally was a myth. The market didn't rally, seven high-profile stocks did.
The success of the so-called Magnificent Seven – Alphabet, Apple, Amazon, Microsoft, Meta Platforms, Nvidia and Tesla – has distorted perceptions. For most of the market, 2023 was a challenging year.
Crowd pleasers like chip maker Nvidia, whose shares rose 230 per cent, Meta (up 185 per cent) and electric car maker Tesla (up 130 per cent) distracted investors from deficiencies almost everywhere else as stubbornly high inflation and mounting geopolitical concerns weighed on almost every other sector.
The US S&P 500 grew 25 per cent last year but exclude the Magnificent Seven and the figure falls to a much more routine 8 per cent. About 75 per cent of US shares underperformed the index, despite a strong end to the year.
Many investors failed to notice because the Magnificent Seven have effectively replaced entire indices as stock market bellwethers in their minds, says Nick Saunders, chief executive of stock trading platform Webull UK.
“Instead of asking how the Dow Jones has done, investors are looking at the price of Tesla.”
It led to what must surely be the most concentrated stock market rally in history, built on the shoulders of a handful of giants.
So much for 2023. It’s 2024 now and Big Tech looks pricey and risky at today’s extended valuations, leaving investors to look for a new story to tell.
Enter the “everything rally” theory.
This is based on the idea that the rest of the market will catch up as inflation peaks and interest rates fall, boosting sentiment and stock prices across the board.
We saw signs of this in November and December, as markets rallied across the board, even in the otherwise declining UK.
That was driven by hopes that the US Federal Reserve would cut interest rates six times this year, with the first coming through as soon as March.
Markets were forced into a rethink in early January, as central bankers sought to temper expectations and the rally faltered. Investors now expect four US cuts, with a 65 per cent probability that the first will land in May.
Yet, US stocks have now climbed four weeks in a row to set a record high on Friday, closing at 4,958.61 after strong jobs and wage growth numbers.
However, there are signs that investors are growing wary of the Magnificent Seven’s chances of riding to the rescue again.
Google owner Alphabet dropped 7.5 per cent last Wednesday, despite reporting 13 per cent revenue growth to $86.3 billion.
Microsoft fell a more modest 2.67 per cent, but that followed an 18 per cent rise in sales to $62 billion.
Last Thursday, shares in Elon Musk's Tesla fell 12 per cent, the biggest drop in a year, after automotive revenue rose just 1 per cent to $21.6 billion and management warned of “notably lower” volume growth in 2024.
Ismael Rashid, equity analyst at Charles Stanley, suggests the Magnificent Seven may have already lost one of its members.
“Tesla's fortunes seem to have reversed rather sharply following a slowdown in demand due to increased competition.”
Many investors fear that tech stocks have been pushed too high, too quickly, says Fawad Razaqzada, market analyst at City Index and Forex.com.
“The pace of the rally raises concerns, particularly as many companies have yet to effectively monetise generative artificial intelligence.”
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Then stellar after-hours results from Amazon and Meta Platforms on Thursday swept these concerns away, says Axel Rudolph, senior market analyst at online trading platform IG. “This contributed to Friday’s risk-on sentiment.”
The rest of the S&P had a strong earnings season, too, with an estimated 80 per cent of companies beating expectations.
The Magnificent Seven may dominate but they aren't the sole driver of the recent rallies, says Daniela Hathorn, senior market analyst at Capital.com. “The equally weighted index has also reached new highs.”
Revised interest rate cut expectations haven’t put them off their buying spree, Ms Hathorn says. “Traders are still piling into stocks, both tech and non-tech, even as the Fed pushes back on immediate rate cuts.”
Risk appetite is set to spread beyond the mega-caps, says Vijay Valecha, chief investment officer at Century Financial. “The broader market has become relatively cheaper, which could set up the next stage of market growth.”
European and UK markets now look undervalued and “less speculative, longer-term investors may well see value here”, says Mr Saunders at Webull UK.
Yet, the everything rally theory looks a little like wishful thinking, says Richard Hunter, head of markets at Interactive Investor. “It is difficult to envisage a situation where all asset classes rise in tandem, let alone across all geographies,”
Tech remains well set as the AI-fuelled frenzy of last year looks set to continue, he says. “Although the bar will be continually raised as expectations rise.”
Lower interest rates may boost more traditional companies as borrowing costs fall, amid growing hopes that the US will avoid recession, but other markets face challenges.
The UK market remains “deeply out of favour with international and institutional investors alike”, Mr Hunter says.
“Many agree that its shares are too cheap, but it could require a seismic shift for London’s stable, defensive, income-paying blue chips to swing back into fashion,” he adds.
China faces challenges including low demand, high youth unemployment and a beleaguered property sector. Europe is struggling.
“Given the challenges out there, it’s hard to predict an everything rally with real conviction,” Mr Hunter says.
But is it right to expect US tech to carry the load for another year? It’s certainly too early to write them off, including Tesla. Some may even see its recent reversal as a buying opportunity.
Big Tech is still the one to beat. Investors will hope that this changes when the first interest rate cut comes through.
Until then, the everything rally looks like being a myth, too.