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Kristy Akullian, iShares Senior Investment Strategist, discusses the so-called “Magnificent 7” stocks as well as the 2024 outlook for the rest of the S&P 500.
Just seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – accounted for 60% of the S&P 500’s 2023 performance.1 This episode features Kristy Akullian, iShares Senior Investment Strategist, discussing the 2024 outlook for these so-called ‘Magnificent 7’ stocks – as well as the rest of the S&P 500.
Contradicting the idea this cohort of mega-cap tech has run ‘too far, too fast’ or is even in a bubble, Akullian notes the following:
00:00:00:00 - 00:00:26:21
AARON
This podcast is intended for investors who partner with a financial professional. What we like to call the advised investor. I'm your host Aaron Task, and our guest for this episode is Kristy Akullian, senior member of the iShares Investment Strategy Team. Steve McQueen's 1960 Classic, the 2016 remake featuring Denzel Washington and of course, Akira Kurosawa's original Seven Samurai, all made a mark in cinematic history.
00:00:26:24 - 00:00:49:04
AARON
So too did the so-called Magnificent Seven Stocks Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, which accounted for a whopping 60% of the S&P 2023 performance.1 So what will 2024 bring for these seven mega caps? And what about the other 493 stocks in the S&P 500? Stay tuned to find out. Welcome to BlackRock's In the Know podcast.
00:00:56:27 - 00:00:58:29
AARON
Kristy, thanks for joining us.
00:00:58:29 - 00:01:03:02
AARON
Last year, of course, we heard so much about the so-called Magnificent Seven.
00:01:03:02 - 00:01:06:15
AARON
Can those names continue to outperform in the New year?
00:01:06:15 - 00:01:28:28
KRISTIE
Hey, Aaron. Thanks for having Yeah, So, you know, I think that almost in some ways we went from having The magnificent Seven in 2023 to thinking about these as some as the Maligned Seven in 2024. Right? I think there's a lot of focus in terms of how much they have delivered thus far and sort of the question of how much gas do they have left to continue in 2024.
00:01:29:00 - 00:01:33:11
KRISTIE
I think it's really important and I think framing matters here.
00:01:33:11 - 00:01:34:03
KRISTIE
So, you know what do I mean by that?
00:01:35:02 - 00:01:56:02
KRISTIE
If you take a look at a different time horizon. So I know everybody has been quoting 20, 23 stats in terms of how these stocks have performed. If you go back to the beginning of 2022, what you actually find is that the S&P 500 index is actually only up 3% from the beginning of 2022 to the end of 2023.2
00:01:56:05 - 00:01:58:28
KRISTIE
And if you look at the Nasdaq kind of as a proxy for some these tech names as well, we actually find that the Nasdaq is still negative from where it was in 2022. So, again, you know, I think a lot of what we saw in 2023 was almost a mirror image, reflection of the really negative year that we had in 2022.
And why I bring that up is because I think that things look a little bit more balanced if you go into it with that approach rather than just looking at last year in a vacuum.
And so maybe don't need to malign the Magnificent Seven quite as much as we have so far.
00:02:29:24 - 00:02:39:27
KRISTIE
But that said, you know, I think it's really important that we know and we acknowledge here that those Magnificent Seven do trade at much richer valuations than the rest of the index.
00:02:40:00 - 00:02:47:17
KRISTIE
So looking at just the Magnificent Seven, those are trading at about 27 times forward earnings right now. If you look at kind of the other 493 cohort, those are trading at about 17 times earnings going forward.3 So certainly a differentiation in terms of how the market is valuing those names.
00:02:59:14 - 00:03:13:26
KRISTIE
I also think it's important to keep in mind that those Mega-cap tech companies were one of the few places where we actually saw EPS growth last year when growth was really hard to find. Right. So I think in some ways, those are the companies that did the work. We saw a lot of cost cutting initiatives by some of those names.
Those are also the companies that had really strong balance sheets. So in some ways, it's not as surprising to see those names rewarded as much as they were. Where that leaves us now is is again, a little bit more fair and balanced.
Can they continue to deliver positive performance? Yes. I think that they can. I think the macro backdrop provides some opportunity for that.
00:03:38:02 - 00:03:42:23
KRISTIE
Do we expect that it's going to be kind of another blowout year like it was last year
You know, no, I'll just say it. I don't think it's going to be quite as much of a runaway for them
in 2024 as it was in 2023.
AARON
Right. So to date, myself, I'm old enough to remember the late 1990s bull run in a lot of other mega-cap tech stocks and the dot coms. I'm not old enough to remember the Nifty 50, but it seems like we periodically the markets get a fascination with a small group of stocks and everybody says, you know, I'm all in on those.
Do you see any similarities to those past eras to where we are today?
00:04:15:09 - 00:04:20:10
KRISTIE
Yeah I think it's a scary starting point to think about those, you know, those names within that context. The one thing I would push back here on again, kind of to go back to this idea that I think the returns that we’ve seen thus far and even in part, some of the valuations that we see right now are quite a bit more justified.
00:04:32:28 – 00:04:45:19
KRISTIE
So again, these companies put in work in a really difficult year and we saw them be rewarded for it. So it doesn’t look as bubbly as something like we maybe saw in the dot com boom.
And I think a lot of those comparisons since probably come from some of the similarities in terms of technology. Right? St the time, it was a boom around the advent of the Internet and what that could mean.
I think that in part what we saw in 2023 was optimism around AI and what that could mean.
I certainly would not say that the entirety of the tech or the growth complex earnings from last year was just predicated on AI optimism. I again also think that it was important that they provided earnings growth in a time where most other parts of the market were not.
00:05:23:10 - 00:05:40:18
And that's also, you know, a way to think about those names, and another reframing of this is just that those were really quality names in a time when economic uncertainty was really high. So it's not that surprising that we see some of those quality attributes like strong balance sheets really be rewarded in that environment.
00:05:41:12 - 00:05:54:08
AARON
Okay. So let's let's move on to the other 493 stocks in the S&P 500, much less what is the 1993 and the Russell 2000? Keep going with the Wilshire 5000, but that's too much math for me.
00:05:54:08 - 00:05:58:09
obviously, Magnificent Seven Stocks, huge generated performance last year.
But the market did start to broaden out through the course of 2023. Do you expect that broadening is going to continue in 2024?
00:06:06:18 - 00:06:29:06
KRISTIE
So I'll give you my short answer first and then the long answer. The short answer is yes. We do think that the market can continue to broaden out, and we've seen some of that already, particularly, and the really strong rally that we saw in November and December. So if you go back to May of 2023, all of the S&P 500 return at that point could be attributed to just those seven names by December.4
00:06:29:06 - 00:06:37:22
KRISTIE
And where we kind of ended the year that was down to just about 60%. So, again, we've seen some of this broadening out of the equity markets.
00:06:37:22 - 00:06:38:09
KRISTIE
I think you know, that can continue. The one condition that I'll add here, the one caveat is that that can continue as long as economic growth remains positive.
00:06:47:06 - 00:06:48:10
So a lot of the parts of the market that maybe didn't participate in the upside that we saw last year were the more economically sensitive, the cyclical names.
00:06:55:26 - 00:07:11:17
You know, we know that growth continued to surprise to the upside, but I think the surprise was really the important part. Investors want position for it and they weren't necessarily continuing to reward economically sensitive parts of the market because every month we expect, you know, a recession to hit.
00:07:11:20 - 00:07:12:05
KRISTIE
And so I think that was part of kind of what weighed on the rest of the cohort, the 493 last year. And as we started to see a clearer picture of potentially a soft landing, I think that that equity market rally just continues to broaden and we see more participation across the other names as well.
AARON
Okay and so where do you see potential opportunities for that broadening, or where would you focus your attention if you were an investor considering how to implement some of the things you're talking about here.
00:07:41:16 - 00:07:45:28
KRISTIE
That's the million dollar question, right, Aaron? We have coined the phrase that we like to talk about this called the lovable laggards. So what do we mean by that?
00:07:50:23 - 00:08:00:20
We are really trying to identify parts of the equity market, again, that haven't participated in the rally that we saw last year, but that still look like quality companies.
00:08:00:20 - 00:08:09:00
We are leaning a little bit more pro-cyclical with these lovable laggards -- again, because we've seen economic growth surprise to the upside.
00:08:09:00 - 00:08:17:06
We've seen that we are probably at the end of a Fed hiking cycle and that can all conspire to be sort of a positive macro environment for some of these some of these types of exposures.
00:08:19:25 - 00:08:21:05
One area that we see some opportunity in that maybe we haven't talked about for the last few years is small caps. So small caps have traded at a discount to large caps, not only on an absolute basis, but on a relative one as well. So if you look kind of relative to its own history over time. So I think that small caps are much more economically sensitive.
00:08:43:01 - 00:08:47:10
So it makes sense. When we thought we were headed into a recession last year, that those were not particularly rewarded. But even within this cohort of smaller cap companies, we still like staying up in quality. So this is one of those instances where index construction really matters.
00:08:59:24 - 00:09:13:00
Our preferred exposure for this and where we think we see the best opportunity is something like IJS, which is the iShares S&P 500 Small Cap ETF. Importantly, the S&P index construction, in terms of how they look at the broader universe, they apply a profitability screen.
00:09:18:07 - 00:09:24:09
So that's not something that you get in every small cap exposure, but it does add an element of quality that we think is going to continue to be important for next year.
Another area where investors can add risk selectively within a portfolio would be financials.
00:09:32:23 - 00:09:43:22
IYF is the iShares U.S. Financials ETF. And again, this is one part of the market that really didn't participate in 2023’s rally and tends to be really pro cyclical. So if we continue to see economic growth stay positive or even surprise to the upside, that could be an area for a potential catch up trade.
00:09:55:12 - 00:09:57:20
AARON
Alright Kristie, thanks so much for joining us.
And thanks to all for tuning in and talk to your financial professional and adjust accordingly before taking any action.
Spoken Disclosure:
Visit www.iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.
1Bloomberg, as of 12/31/23.
2Source: Bloomberg, 12/31/21 - 12/31/23
3Factset, as of 12/31/23
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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
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Akullian believes the Magnificent 7 can continue to deliver positive performance, noting improvements in the macroeconomic outlook compared with this time a year ago.
That said, she doesn’t expect a repeat of 2023’s blockbuster performance by the tech giants and sees an opportunity for a broadening of the market in 2024 “as long as economic growth remains positive.” (Note: The audio interview was conducted prior to fourth-quarter earnings reports from the Magnificent 7.)3
The iShares Investment Strategy team coined the term “lovable laggards” to describe the sectors where they see the best opportunities this year.
Which sectors… and what exactly is a “lovable laggard”?
Listen to the latest episode of BlackRock’s “In the Know” podcast to find out!
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1 Bloomberg, as of 12/31/23. Past performance does not guarantee future results. This is not meant as a guarantee of any future result or experience. This information should not be relied upon as research, investment advice or a recommendation regarding any security in particular. Specific companies or issuers are mentioned for educational purposes only and should not be deemed as a recommendation to buy or sell any securities. Any companies mentioned do not necessarily represent current or future holdings of any BlackRock products.
2 Source: When Performance Matters: Nasdaq-100 vs. S&P 500, Fourth Quarter '22 | Nasdaq Past performance does not guarantee future results.
3 Source: BlackRock. This interview was recorded on Jan. 16, 2024, prior to fourth-quarter earnings reports from any of the 'Magnificent 7' stocks.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in the value of debt securities. Credit risk refers to the possibility that the debt issuer will not be able to make principal and interest payments.
An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
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