A common belief at the end of 2023 was that there would be a broadening, after only a handful of stocks supercharged the market. So… what happened?
The first half of 2024 has been somewhat similar to the back half of 2023: market concentration as megacap stocks steal the show. Investors’ eyes remain on the magnificent returns; however, the S&P 500’s earnings growth has largely stemmed from the same stocks as its price movement!
There was still a choir of investors at the start of the year cheering for a broadening away from megacaps and out of tech stocks. The main theses were that tech earnings growth would revert back to the mean, or that the market’s neglected stocks were due.
First quarter earnings didn’t tell the story that broadeners had hoped for. Bloomberg data shows that the S&P 500 had a solid 5.9% earnings growth, with megacaps being enormous contributors. Megacaps weren’t the whole story, however, as earnings broadened within tech+.
We don’t think that a market-wide broadening is a necessary occurrence insofar as earnings remain concentrated.”
While the prophesized market-wide broadening has not materialized, more tech+ companies are driving earnings and rallying as a result. Over 70% of both the information tech and communications sectors had positive earnings growth YoY, according to Bloomberg. The tech sector reported a 26% improvement in earnings versus S&P 500 ex-technology earnings falling by 3%.
The Target Allocation team said at the beginning of 2024 that a full-on broadening was unlikely, and we’ve sung that tune throughout the first half. The equal weighted S&P 500, which disfavors concentration, has moved up at a slower clip than its parent index both YTD and in the last month as companies reported their quarters.
This earnings season fell in line with our expectation that software, semis, and broad tech would remain leaders. We don’t think that a market-wide broadening is a necessary occurrence insofar as earnings remain concentrated in certain sectors – the market chasing after fundamentals means that it’s doing its job!
Our team has focused on leaning more into tech+ and where earnings have the most potential. Right now, we think that techy sectors continue to provide us with an ample earnings engine while we buy others selectively and hunt for tactical opportunities.
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