The Magnificent 7 Lifted Stocks in 2023. Here are Investment Opportunities in 2024.

Key takeaways:

• 1. After gains in US stocks were led by tech stocks, a sustained improvement in the economic outlook may shift investors’ focus towards the broader market in 2024.
• 2. With earnings recovery, there may also be opportunities in the wider tech universe as well as the healthcare sector.
• 3. Investors may also consider thematic and structural ideas outside of the US.

What Happened?

2023 was a rewarding year for US stock investors.

As of 15 December 2023, the S&P 500 index rose by 23% this year. The Dow Jones Industrial Average (DJIA) reached an all-time high after gaining 13% this year. Tech stocks performed even better, with the Nasdaq rising by 43% this year and reversing its decline in 2022.

Much of the gains were led by big tech stocks, which delivered much resilience even with elevated interest rates. In particular – the ‘Magnificent 7’ – a group of seven large tech companies were at the centre of investor focus with their magnificent share price performance.

The Magnificent 7, which include Alphabet (GOOGL), Apple (AAPL), Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), soared between 49% to 242% this year, far exceeding the returns on the S&P 500 and Nasdaq.

Clearly, investors have shrugged off much of the volatility through the year, as greater confidence about a potential Federal Reserve rate cut has offset concerns about financial stability amongst the US regional banks, a slower than expected pace of recovery in China, as well as an escalation of geopolitical uncertainty in the Middle East.

With the higher interest rates, many investors also tapped into opportunities to earn a higher yield on cash holdings. According to the Investment Company Institute, total money market fund assets surged to US$5.9 trillion as of December 2023 from below US$5.0 trillion at the start of the year. Closer to home, demand for Singapore Treasury Bills (T-bills) surged with total applications for the 6-month T-bill reaching S$14.7 billion in the auction on 12 October.

As we head into 2024, many investors have asked if it is time to put more cash to work. As we deploy more cash sitting on the sidelines, should we still focus on the Magnificent Seven? Or are there opportunities elsewhere worth considering?

Is There More Upside to the US Stock Market?

Heading into 2024, the good news is that the global economy appears to have averted a recession. According to forecasts by the International Monetary Fund (IMF), the global economy is expected to expand by 2.9% in 2024, supported by continued growth in emerging markets as well as resilience in advanced economies. Economic growth in the US is projected to be 1.5% in 2024, despite concerns of higher interest rates dampening activity significantly.

In recent months, we have seen an acceleration in manufacturing and trade activity globally. For example, China’s industrial production rose by 6.6% in November, accelerating from the growth of 4.6% in October. In Singapore, industrial production expanded by 7.4% year-on-year in October, reversing 12 consecutive months of decline.

The resilience in the global economy bodes well for the earnings of US companies, as nearly 40% of revenues for S&P 500 companies are earned abroad. This could help more companies return to earnings growth in 2024, reversing the trend where close to half of the key sectors in the US delivered negative earnings growth in 2023.

Should we Look Beyond Big Tech?

As global economic recovery gains momentum and the earnings outlook for US companies turns more positive, the strong performance for large cap tech stocks may broaden out to other stocks in the S&P 500 index, where investor expectations are lower.

According to Citi Global Wealth Investments, the 2024 price-to-earnings (P/E) ratio of the remaining 493 stocks in the S&P 500 index is at 16.6x, below the P/E ratio of 29x for the Magnificent 7. This means that there may be value opportunities within other sectors of the US market.

Which are the Sectors We Should Consider?

Outside of the Magnificent 7, the broader tech sector and health care sector might also be worth considering outside as the earnings recovery extends beyond large cap tech stocks.

As artificial intelligence (AI) continues to remain on the radar of investors, there is a potential for the boom in the AI industry to benefit more companies across the entire value chain. For example, while large semiconductor companies have taken the lead in the development of AI chips, there are many other companies that are essential for the industry to grow.

For investors looking for more defensive sectors, it is worth noting that the health care sector is also expected to return to earnings growth in 2024. This follows the sector’s weak performance this year as a moderation in demand after the Covid-19 surge and rising financing costs led to the first earnings contraction in 2023.

According to Citi Global Wealth Investments, it might be worthwhile looking for opportunities in life sciences tools companies which help administer and facilitate drug trials, early-stage biotech firms, as well as other forms of health care innovation.

Should we Consider Opportunities Outside of the US?

The performance of non-US markets has trailed the US market, which has demonstrated an ability to deliver higher and much more consistent earnings and dividend growth. This has led to the question of whether there might still be a place for non-US stocks in a diversified portfolio.

All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

According to Citi Global Wealth Investments, there are various structural themes that may help to drive the outperformance of selected sectors outside of the US. For example, investors can keep a close lookout for the small but vibrant tech sectors in Europe and Japan, as well as international consumer names that may benefit from a rising Asian middle class.

Shifting Gears into 2024

While investors were focused largely on big tech stocks and government bonds in 2023, it may be time to shift gears and consider other opportunities as we head into the new year.

According to Citi Global Wealth Investments, the key themes we can delve deeper into include:

• • A broadening out of the US stock market rally to other sectors beyond large tech
• • The larger tech universe and healthcare sector may see a recovery in earnings
• • Structural and thematic plays outside of the US stock market

If you are looking to gain a head start in your wealth journey as we enter the new year, Citigold offers exclusive privileges for clients to gain access to timely wealth insights through its global network of expert analysts and advisors. Start your wealth journey with us to enjoy access to these opportunities today.

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