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2024 Investment Markets: Performance, Concentration, and Parallels
by Kevin Kroskey, CFP®, MBA
The investment landscape in 2024 was defined by strong yet uneven returns across asset classes, as market concentration in U.S. equities reached new heights. While the most utilized global equity index, the MSCI All Country World Index, returned about 17%, performance was again driven disproportionately by a small number of mega-cap technology stocks, causing more diversified investors to lag.
Broad Market Performance
U.S. equity markets outperformed global peers in 2024, continuing a trend driven by the dominance of the “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The S&P 500 delivered a robust total return of approximately 25%, buoyed by these mega-cap tech companies, which together contributed over two-thirds of the index’s performance.
However, returns outside the largest companies were muted. Equally weighting all of the companies in the S&P 500 index delivered a more modest 12% gain, highlighting the narrow breadth of the market rally.
International equities offered less impressive returns, broadly dragged down by the strengthening of the U.S. Dollar. The MSCI EAFE Index, representing developed foreign markets, gained 11% in local currency but just 4% in USD. Emerging markets, tracked by the MSCI Emerging Markets Index, returned 13% in local currency and 8% in USD. Removing the impact of the Magnificent Seven and the U.S. dollar, returns were similar between the U.S. and these foreign markets.
For bond markets, significant interest rate volatility persisted in 2024. Despite the Federal Reserve lowering short-term rates three times by a cumulative 1.0% in 2024, the longer-term U.S. 10-year rate climbed by more than 0.7% to 4.6%.
The Bloomberg U.S. Aggregate Bond Index, a benchmark for investment-grade bonds, posted a total return just north of 1%. Short-term bonds performed better, while long-duration assets remained under pressure due to a general increase in long rates.
Market Concentration and Historical Parallels
The dominance of the Magnificent Seven in 2024 created a challenging environment for diversified investors. These seven companies accounted for a historically high proportion of the S&P 500’s market capitalization, surpassing 30%. Investors in capitalization-weighted indices, such as the S&P 500, benefited disproportionately from the stellar performance of these stocks. Cap-weighting forces more purchases as a company grows faster relative to others in the index. So as the Magnificent Seven outperformed, additional purchases were required to maintain index weightings. In a sense, cap-weighting is not akin to the adage “buy low and sell high.” Today it is more like “buy high and (hope to) sell higher.”
This concentration-driven rally continues to draw parallels to past periods of elevated market valuations and speculative fervor. The “Nifty Fifty” era of the early 1970s saw a narrow group of high-growth, blue-chip companies dominate the market, only to deliver subpar returns over the following decade as valuations normalized. Similarly, the late-1990s Tech Bubble, having its own moniker for darling stocks “The Four Horsemen” – Cisco, Dell, Intel, and Microsoft – was characterized by sky-high valuations. If you invested equally into the stocks of these horsemen from January 2000, it took a whopping 16 years to get back above zero and slightly into the black. (This omits Dell, as it went private in 2013 for a period of time.)
In both cases, investors who chased these darling stocks of the time faced disappointing long-term outcomes. A great company is not necessarily a great investment. When a stock gets too expensive, it becomes prone to disappointment. Prices become bid up amid expectations of continued exceptional growth, which often prove unsustainable.
The parallels between 2024 and these historical episodes are striking. Valuations of the Magnificent Seven are at elevated levels with many trading at price-to-earnings ratios exceeding 40x, reflecting lofty expectations for future growth and profitability. While these companies remain leaders in innovation, investors are increasingly questioning whether such valuations can be justified.
History suggests that periods of extreme market concentration often precede more subdued returns as leadership broadens and valuations revert toward historical norms. Diversified investors, who may have trailed in 2024, could benefit from a reversion to a more balanced market environment in the years ahead.
As investors navigate the road ahead, the lessons of the Nifty Fifty and Tech Bubble periods serve as a reminder that concentration-driven rallies often come with heightened risks. A disciplined approach emphasizing diversification and valuation sensitivity may be critical to weathering potential market shifts and achieving sustainable returns over the next decade.
Not to end on too sour of a note, but Vanguard recently announced their 10-year expected return forecasts, which consist of a whopping 3%-5% annualized return for U.S. equities in large part because of elevated valuations. Gulp. The U.S. 10-year note offers a 4.6% government-guaranteed return over the next 10 years. If this comparison is a bit confounding, it may be time for a second opinion on your investment strategy.
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Kevin Kroskey, CFP®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email kkroskey@truewealthdesign.com.
Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.