Will 2024 Be the Breakout Year for Neglected S&P 500 Stocks?

As we step into the year 2024, investors are grappling with a pressing conundrum: which stocks and sectors will lead the market? The dominant 'Magnificent 7,' comprising tech and retail behemoths like Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta, have had an astonishing run. In the past year, these seven companies alone saw an increase of 71% in their stock prices, elevating their collective sway over the S&P 500 index to nearly 30%. This has left the other 493 companies in the index lagging considerably behind, with a combined gain of just 6%.

But the critical question now is whether these seven front-runners will continue their market dominance or give way to the broader array of stocks that have, until now, been overshadowed.

Valuations and Market Performance

Market valuations, which can fluctuate widely due to investor sentiment, play a vital role in stock performance. For instance, the S&P 500's rise of 23% last year can be attributed equally to an increase in earnings and to investors' growing willingness to pay more per share.

Understanding this, we can analyze the potential of the broader market by looking at the Price-to-Earnings (P/E) ratios and forecasted earnings per share (EPS). Data from S&P Global aids in this analysis, comparing current P/E ratios to their pre-pandemic averages and more recent figures.

The Potential Rise of the Underdogs

Healthcare, Consumer Staples, and Utilities, the underperformers of the past year, now show the most promising potential for growth in 2024 based on our valuation analyses. In particular, the Energy sector could see exceptional returns if its P/E returns to pre-pandemic levels, though its earnings are highly volatile.

While growth in sectors like Technology, Communications, and Consumer Discretionary has been strong, their forward projections more closely align with the overall market expectations.

The Power of Sentiment

Despite the analytical data supporting a diverse range of stocks, investor sentiment can often overpower fundamentals. High valuations and popularity have kept sectors like Technology and Communications at the forefront of market trends, allowing them to maintain their high prices.

Conversely, even sectors with strong fundamentals, such as those benefiting from the EV boom, may continue to be overlooked if they don't fall into the current market favor, as demonstrated by the contrasting fortunes of Nvidia and Albemarle.

Investor Strategy for 2024

Predicting market sentiment can be challenging, but it's important for investors to stay informed and prepared to adjust their strategies if needed. While trends and investor enthusiasm are influential, being aware of the underlying market conditions and impending shifts is crucial. Flexibility and respect for ongoing trends should be balanced with a cautious approach towards possible changes in the market landscape.

stocks, investing, valuation