Mark Lister: Is it too late to buy US stocks?

OPINION

The United States sharemarket has had a stunning run of late.

After rising 24.2 per cent in 2023, the S&P 500 index has picked up where it left off this year, adding a further 5.4 per cent in the first six weeks of 2024.

US shares peaked in January 2022, before declining 25.4 per cent over the following nine months in the wake of rapidly rising interest rates.

Since those October 2022 lows, the market has rebounded 40.5 per cent.

In recent weeks it’s surpassed that previous peak from two years ago, moving past 5000 points for the first time, a significant milestone.

Against that backdrop, many investors are questioning whether the world’s biggest sharemarket is a little overcooked and if it’s too late to invest in US stocks.

To help answer that question, let’s take a closer look at where this strength has come from.

The gains haven’t come across the board, with the so-called “Magnificent Seven” having an outsized impact on the performance of indices like the S&P 500.

Coined by Bank of America analyst Michael Hartnett last year, this term has caught on to describe a group of high-growth companies that have surged over the past year or so.

It comprises chipmaker NVIDIA (pronounced in-VID-ee-yah), tech behemoths Microsoft, Apple and Amazon, electric vehicle pioneer Tesla, Meta (previously known as Facebook) and Alphabet, the owner of Google.

These companies have seen their share prices rise an average of 148 per cent since the beginning of last year.

That strength has led to increasingly large weightings within the S&P 500 index, with the Magnificent Seven now representing a whopping 29 per cent of this benchmark.

In short, this concentrated group of companies has done most of the heavy lifting when it comes to the strong gains from US shares.

These seven stocks are spread across three market sectors - technology, communication services and consumer discretionary.

We often think of them all as tech companies, although Alphabet and Facebook are officially classified as communication services, while Amazon and Tesla are part of the consumer discretionary sector.

When we look at the rest of the market, the performance picture looks very different.

The other eight sectors of the S&P 500 (including the likes of healthcare, materials and consumer staples) have risen by an average of just 4.1 per cent since the beginning of the 2023.

Similarly, an index that tracks the performance of the other 493 stocks has gained 16 per cent over that period.

The Magnificent Seven have indeed had a stellar run, although this hasn’t been simply due to unbridled optimism and share prices getting more expensive.

There have been some genuine improvements in fundamentals, with earnings growing strongly and the long-term outlook brightening considerably on the back of AI developments.

The group saw earnings increase about 30 per cent in 2023, a much better showing than the small decline we saw from the rest of the market.

I wouldn’t count on the Magnificent Seven repeating last year’s performance, but I also wouldn’t bet against them.

These market-leading companies offer investors a growth exposure of the highest quality, supported by strong balance sheets, astute capital expenditure plans and highly profitable business models.

I’m inclined to stay invested in this group, but to also take a much closer look at other parts of the market that have been ignored and unloved amid all this AI excitement.

At the headline level the US market has surged ahead, but the gains look much more subdued when we look beyond the star players.

The coming year could see less divergence in earnings and share prices, as the performance of the market overall hopefully broadens out.

Smaller companies, more traditional businesses, and sectors with more modest growth prospects (but also less demanding valuations) could be a lucrative hunting ground for investors, especially those reluctant to chase 2023′s market MVPs.

Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.