Market Shifts: From Growth Stocks to Broader Market Participation

Since Q4 2023 growth stocks (predominately technology) of the “Magnificent 7” have been driving the markets higher – in particular, the S&P 500 and the NASDAQ markets.  This small cohort of mega capitalizations (Apple, Amazon, Meta, Google (Alphabet), Tesla, Microsoft & Nvidia) now comprise close to 35% of the S&P 500.  It’s important to note that the S&P 500 is a “cap-weighted” index, therefore the performance of the largest companies have the biggest impact on the index.

It was not that long ago when many were questioning when the “other 493 stocks” were going to be more additive.  As of today, we feel that question is in the process of being answered.

As of late, the “Mag 7” has shown underperformance relative to the Dow Jones and the S&P 500 Equal Weighted Index.  Evidence that we are finally seeing some catch-up by the broader market (the aforementioned 493).

This recent development is good news for investors. As we are staunch pundits of diversification, broader market participation is very welcomed news.

As value stocks attempt further rebounding, does this recent shift speak to a broader “leadership change” where growth stocks potentially fall out of favor and value stocks trend higher?

We suspect there is some change in motion and future momentum, which again benefits long- term investors positioned in globally diversified portfolios.

Moreover, we think we are at the cusp of advantageous policy changes. Thanks to inflationary pressures subsiding (albeit slowly), the FED’s anticipated easing of restrictive monetary policies should be more stimulative to the economy.

The combination of lower unemployment claims, positive corporate earnings, stronger than expected GDP, upbeat retail sales and rising wages has all bolstered the US economy.

The hope for a soft landing, where inflation is controlled and the economy does not experience negative growth, is a plausible scenario.  Further data and time will be needed to draw additional conclusions, but I think it is fair to say BaldwinClarke remains cautiously optimistic going into the 4^th Quarter.

Our tempered optimism stems from the following factors: 

• On September 17^th, the FED will reconvene and it is highly anticipated (expected) that we will see the first rate cut (likely .25%, or even .50%).  This view is driven by slightly lower than expected job creation (140,000 jobs created in August versus the expected 160,000 jobs), GDP trending slightly lower, and inflation showing improvement.
• We also anticipate additional interest rate cuts before year-end (two cuts seem likely). 

Looking out to 2025 at this point in time, we see the FED taking a methodical approach to lower interest rates, likely cutting federal funds rates every time they meet (every FOMC meeting).  When the cost of borrowing moves lower, money tends to flow more freely into and through the economy.  Overall, we see this creating a more conducive environment for the economy and the consumer (wage & job growth).

And lower interest rates favor both the stock and bond markets.

For less aggressive investors with higher bond allocations, stay patient.  As the prospects for the bond market(s) in a declining interest rate environment tend to be good.  Barring any surprises or the absence of a catalyst (no FED cut in September), we remain encouraged as we move into the 4^th Quarter.