Investors spent 2023 worried about the sustainability of the stock rally, driven primarily by a small number of big tech stocks. These concerns remain even as the S&P 500 returns to its all-time highs at the beginning of the year.
“As usual, concentration risk concerns are once again gaining significant attention as selected mega-cap stocks continue to pace their performance in early 2024, especially in the coming months,” Brian said. “If there is a reversal, what kind of impact it will have on stock market performance is attracting attention.'' Belsky, chief investment strategist at BMO Capital Markets, said in a note.
He said this is a topic that comes up frequently in conversations with clients and seems to be what investors are most concerned about.
The good news, Belsky said, is that investors may be overestimating the risk that a mega-cap reversal poses to the bull market.
Instead, BMO's analysis shows that the S&P 500 SPX has performed well following the peak in the relative performance of the top 10 stocks. Mr. Belsky highlights the data below, showing that the S&P 500 has averaged a 14.3% return in the year after the peak of his historical relative performance since 1990.
| Performance of the S&P 500 Index over the past year after its peak in the same period last year Relative performance of the top 10 stocks in the S&P 500 Index | |
| Year | performance |
| 1992 | +12.4% |
| 1998 | +38.7% |
| 2001 | -22.6% |
| 2009 | +22.2% |
| 2013 | +17.9% |
| 2019 | +2.2% |
| 2021 | +29.2% |
| average | +14.3% |
| Source: BMO Capital Markets, FactSet | |
The only time the index posted losses was in 2001, after the tech bubble burst, and despite recent commentary to the contrary, Belsky maintains that period is incomparable.
The so-called Magnificent Seven stocks — Apple Inc.
AAPL
,
Amazon.com Inc.
AMZN
,
Alphabet Co., Ltd.
Google
google
,
Meta Platforms Co., Ltd.
Meta
,
Microsoft Corporation
MSFT
,
Nvidia Inc.
NVDA
and Tesla Inc.
TSLA
— dominated stock market returns in 2023.
read: AI hype around 'Magnificent 7' stock is latest example of 'massive market delusion'
In 2024, leadership will become even more concentrated, with Microsoft, Meta, Amazon and Nvidia doing most of the heavy lifting, Adam Turnquist, chief technical strategist at LPL Financial, said in a note Tuesday (see chart below). ).
“It's hard to deny the outsized impact that the largest stocks can have on market performance, given their large index weights, especially if stocks start to decline,” Belsky said. We believe that this is of greatest concern.”
But investors should keep in mind that the S&P 500 almost always sees a technical correction at some point during the second year of a bull market, Belsky said. BMO claims the bull market began following the bottom of the S&P 500 bear market in October 2021.
So even if surging mega-cap stocks start to struggle and cause a broader market downturn, that alone won't be enough to cancel out the bull market outlook, he said.
With the S&P 500 index averaging a maximum drawdown of about 10% in the second year of the bull market, investors should be “instead of being passive or reactive to short-term performance trends, We need to remain proactive and disciplined,” he wrote. .
The S&P 500 and Dow Jones Industrial Average DJIA were both on track to end at all-time highs Wednesday.
