U.S. equity markets enjoyed a robust performance in 2023 and now investors are confronted with a critical decision in 2024 to either maintain exposure to the Magnificent seven stocks, which have propelled equity indices higher, or to explore opportunities elsewhere within the broader market.

The shares of the renowned Magnificent seven have individually surged between approximately 50% and 250% in 2023, solidifying their status as the market’s most lucrative investments. Accounting for nearly two-thirds of the S&P 500’s 24% gain last year, due to their substantial weightings, these companies have been crucial in driving the overall market performance.

However, expectations that the Federal Reserve could start cutting interest rates in the first half of 2024, and anticipation the economy would remain resilient and avoids a recession, it has stimulated activity in other parts of the market over the past few months.

The significant rally in the tech giants have made them overvalued and susceptible to profit-taking, prompting a shift in focus towards opportunities elsewhere in the market. Despite more than 70% of S&P 500 stocks underperforming the index in 2023, we are seeing signs that the rally is broadening.

The equal-weight S&P 500, has surged almost 19% since October 2023, outpacing the 16% increase in the standard index, while the Russell 2000 has soared 27% during the same period, marking its most substantial outperformance in almost three years.

The most important factors that are likely to influence the market in 2024 are the trajectory of inflation, which would determine the number of interest rate cuts by the Federal Reserve, as well as the overall health of the U.S. economy. The lead-up to the U.S. presidential elections in November could also contribute to heightened market volatility.

While other market sectors may struggle to replicate the appeal of the Magnificent Seven, such as their size and competitive advantages, potential rotations into small or mid-cap stocks and the laggards of 2023 are anticipated in 2024, if interest rates start to moderate. While the Magnificent seven are likely to continue to attract investors interest, as most of them are suitable long-term holdings for portfolios, and the artificial intelligence boom is likely to be in vogue for a while, a repeat of their 2023 stellar performance is unlikely.

Such potential rotation won’t be permanent as the Magnificent seven are great companies. We are just concerned that they have run too far, too fast, and have become overvalued with some of them trading on high expectations for future earnings, such as Nvidia. We have already witnessed some profit taking in the big tech stocks from the onset of the year and we are inclined to believe that other segments of the market would fare better in 2024.