- The Magnificent Seven Fuels the S&P 500's Rally
The S&P 500's recent surge to unprecedented heights can largely be attributed to the stellar performance of seven major tech stocks, known as the "Magnificent Seven" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), which have collectively seen their value skyrocket by nearly 117% since October 2022 (Russell & Rennison, 2024). This remarkable growth, which far surpasses that of the other 493 companies in the index, underscores the significant influence of these tech giants due to the S&P 500's market capitalization weighting system. Despite Tesla's stock value decline from its peak in October 2022, the combined efforts of these companies have been key to driving the index's overall return, accounting for more than 60% of its performance in the past twelve months. Their dominance not only highlights the tech sector's importance but also suggests potential market volatility that their impressive performance may be masking.
This dominance is further emphasized by a Deutsche Bank analysis, which revealed that the combined market capitalization of these seven companies would rank as the world's second-largest country stock exchange, illustrating their significant impact on both U.S. and global financial markets (Smith, 2024). While the "Magnificent Seven" have led the charge, the broader market dynamics and the historical context of such dominance show a pattern of sustained supremacy among a select few companies, despite occasional fluctuations in their rankings. The exceptional returns of these tech behemoths in 2023, driven by AI hype and rate cut anticipations, contrast with a broader market trend suggesting the potential for more inclusive gains. Factors such as a resilient U.S. economy, improved company margins, and effective cost management indicate that investment opportunities may be broadening beyond these tech giants, offering a diversified strategy for investors in the face of evolving economic challenges.
- Global Growth Projections Signals Resilience Amid Challenges
The global economy is poised for modest growth in the coming years, with projections showing a 3.1 percent increase in 2024 and 3.2 percent in 2025, slightly exceeding previous expectations due to the resilience of key economies and fiscal support in China (International Monetary Fund, 2024). Despite this optimistic adjustment, growth forecasts remain below the pre-2020 average, hindered by high inflation control measures, fiscal tightening, and low productivity growth. Inflation is anticipated to decline more rapidly than predicted, falling to 5.8 percent in 2024 and 4.4 percent in 2025, reflecting the easing of supply constraints and strict monetary policies. The economic outlook is stabilizing, with decreased risks of a "hard landing," but challenges persist, including potential commodity price surges and inflationary pressures. Policymakers are now focused on balancing inflation reduction with economic growth, emphasizing the importance of fiscal consolidation, targeted reforms, and multilateral cooperation to navigate future uncertainties and sustain long-term economic resilience.
- Canada's Economy and Inflation: A Path to Sooner Rate Cuts?
The Bank of Canada's estimate that inflation will not return to its 2% target until 2025 may need reevaluation. Recent inflation numbers have been lower than expected, which could mean that interest rate cuts might happen earlier than anticipated (Suhanic, 2024). Taylor Schleich, a strategist at National Bank of Canada Financial Markets, posits that based on the current deceleration pace, the 2% inflation target could realistically be achieved as early as the third quarter of this year. This comes in the wake of Statistics Canada's report indicating a significant slowdown in the consumer price index to 2.9% in February, the first instance since mid-2021 that inflation has dipped into the central bank's target range. Despite persistently high shelter inflation rates, Schleich argues that reaching a 2% inflation rate does not necessitate further slowdowns, potentially hitting the target sooner if economic performance lags or inflation reverts to its pre-pandemic average.
On the economic growth front, Canada's economy ended on a good note in 2023, defying expectations with a 0.2% growth in November and an estimated 1.2% annualized growth in the fourth quarter, overshooting the Bank of Canada's forecasts (Al Mallees, 2024). The economy has shown growth, with a preliminary estimate of 1.5% for the year, which is higher than what the central bank predicted. However, experts advise against being too optimistic as they attribute the boost in November's GDP to temporary factors such as a recovery in the manufacturing sector rather than an increase in consumer demand. The economy is expected to face challenges in early 2024, even though it has shown resilience. As a result, there is a debate about when monetary policy easing should take place. Financial markets are considering potential rate cuts as early as April, while RBC suggests a June commencement. Policymakers are weighing the competing pressures of sustained high interest rates against the backdrop of a surprisingly tenacious economic landscape.
Financial Tip of the Month:
February is the opportune time to start organizing your finances for the upcoming tax season. To avoid last-minute stress and maximize your potential tax return, it's best to take early action before the deadline of April 30, 2024. Start by gathering all necessary documents, including income statements, deductible expenses, and any contributions to retirement accounts. This will help you stay organized and on top of your tax preparation.
At Alpen Investment Advisors, your trusted North Vancouver iA Investia team, we are committed to keeping our valued clients informed. We trust that you have found this market recap informative and insightful. Please do not hesitate to reach out to your dedicated North Vancouver financial advisor, jonathan@alpenia.ca for any questions about your portfolio or to help navigate the process of growing and preserving your wealth.
References:
Al Mallees, N. (2024, January 31). Economic bounce back at the end of 2023 could push back rate cuts, economists say. Retrieved from CTV News website: https://www.ctvnews.ca/business/economic-bounce-back-at-the-end-of-2023-could-push-back-rate-cuts-economists-say-1.6749435
International Monetary Fund. (2024, January 30). World Economic Outlook Update, January 2024: Moderating Inflation and Steady Growth Open Path to Soft Landing. Retrieved from International Monetary Fund website: https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024
Russell, K., & Rennison, J. (2024, January 22). These Seven Tech Stocks Are Driving the Market. The New York Times. Retrieved from https://www.nytimes.com/interactive/2024/01/22/business/magnificent-seven-stocks-tech.html
Smith, E. (2024, February 19). Magnificent 7 profits now exceed almost every country in the world. Should we be worried? Retrieved from CNBC website: https://www.cnbc.com/2024/02/19/magnificent-7-profits-now-exceed-almost-every-country-in-the-world-should-we-be-worried.html
Suhanic, G. (2024, February 23). Posthaste: Bank of Canada a lot closer to inflation target — and rate cuts — than it thinks, strategist says. Retrieved from Financial Post website: https://financialpost.com/news/bank-of-canada-closer-to-inflation-target-rate-cuts-than-it-thinks
