The year started with expectations of up to six Fed rate cuts by year end. This seemed excessive as did expectations that all of the Magnificent Seven would continue to lead the U.S. stock market another year. The first three months have seen higher rather than lower interest rates and a stock market that rose to record valuations (see chart one). Investors are betting that the economy will grow pulling corporate earnings and stock valuations higher.
We did not expect the Magnificent Seven to continue to lead stocks throughout 2024, despite our positive long term stance on the productivity potential of AI. There will be more divergence in returns in 2024 with companies that are still attractively valued that should do well at the same time there are many overvalued companies that should be avoided. This is already apparent with the disparity among the Magnificent Seven with both Apple and Tesla down from the year compared to NVIDEA having soared approximately 80% over the same period.
It is also important to note that fixed income arena has once again significantly underperformed with actual losses compared to the significant gain in stocks (see chart two).
Investors will need a disciplined approach to take advantage of these disparities that many times are not typical or consensus view points.
