Can big tech keep its crown in the year ahead? The recent rally may have started markets down a different path.
- Since the low at the end of October, market leadership has been shared.
- Only China and parts of the commodities complex have not participated in the rally.
- Many fund managers are calling time on the dominance of the technology giants
Apart from a brief hiatus in 2022, markets have been dominated by a handful of technology companies for as long as many investors can remember. Could 2024 finally be the year that market leadership changes? And if so, is it time to steer portfolios away from the technology giants?
The recent rally in markets has provided a window into an alternative reality where markets returns are no longer confined to seven companies (the ‘super seven’ of Apple, Amazon, Nvidia, Microsoft, Alphabet, Meta and Tesla) in a single market. Since the low at the end of October, market leadership has been shared. The S&P 500, which is dominated by the megacaps, is up 15.2%, the S&P 500 equal weighted is up 18%, while the Nasdaq is up 17.2%.
Among the top performers during the market rally have been last year’s laggards, such as infrastructure, property and smaller companies, but their success has not come at the expense of areas such as technology. Only China and parts of the commodities complex have not participated in the market’s exuberance.
Can this benign environment continue? Certainly, many fund managers are calling time on the dominance of the technology giants, saying that valuation are stretched and the spoils of artificial intelligence investment may take time to materialise. That said, very few suggest that their share prices will reverse.
Alex Tedder, head of global and thematic equities at Schroders, says: “The capitalisation of the ‘super seven’ is greater than entire capitalisation of China, Japan, UK and France combined. That looks wrong. While these anomalies can persist for quite long periods, they do close over time. While we’re not negative on the super seven, we think the rest of the world may catch up quite sharply.”
He believes investors will need to diversify more to adapt to this environment. Many portfolios look unbalanced after the recent strength of the US technology names, and this lack of diversification may be exposed in the year ahead.
Equally, it may be an environment in which some overlooked themes can start to emerge. Investors have been narrowly focused on AI, while the significant developments in healthcare, or in other parts of the technology sector have been neglected. After a tough two years, investors may choose to reexamine the renewable energy sectors, where valuations now look more realistic.
Of course, if inflation revives, or economic growth slumps, then all bets are off. Investors may retreat once again to the relative safety of big tech, leaving other sectors untouched. However, there may be a brave new world ahead for markets.
