By Grant Bowers, Portfolio Manager, Franklin Equity Group
If 2023 was the year of the “Great Seven,” 2024 could be a year where small-, mid-, and large-cap companies take center stage, according to Franklin Equity Group.
For those investors who entered the year expecting a continued regime shift away from growth stocks, the stock market’s performance in 2023 will likely come as a surprise. US stocks have broadly posted double-digit returns through November 2023, with shares up nearly 36%.1 These initial expectations were understandable as uncertainties around inflation, interest rates, global growth and geopolitical conflict dominated headlines and were key issues for investors around the world. As the year progressed, inflation moderated significantly and the US Federal Reserve (Fed) slowed the pace of interest rate hikes in response to the new data. Looking ahead to 2024, we expect inflation to continue to moderate and economic growth to continue slow; we remain positive and see the potential for rate cuts to come into focus in the second half of the year. Our view reflects an expectation of a soft landing. If the labor market remains healthy and unemployment hovers around 3%–4%, it is hard to imagine a case where, if the United States enters a recession, it is anything but shallow. That said, we continue to monitor consumer health along with the corporate outlook for signs of a weakening economy.
We believe 2024 will be a positive year for US equities, driven by improving profit margins and the return of earnings growth in most sectors. With current valuations not leaving much room for multiple expansions, a focus on relative growth and the ability to look beyond concentrated benchmarks are where we see the biggest opportunities. As such, we believe 2024 looks particularly attractive to active managers where idiosyncratic factors drive returns outside of macro factors. In this environment, we believe that investors should focus on the quality and visibility of earnings and the areas of secular growth in the economy.
Some areas of focus for us in the new year:
Beyond the Magnificent Seven:2 We expect the breadth of the market to expand to include small and mid-cap companies
A tight group of equity growth stocks, often called the “Magnificent Seven” dominated US market returns in 2023 (Exhibit 1). These companies offered strong cash flows, competitive strength and exposure to generative artificial intelligence (AI). While we continue to view these companies as market leaders, we do not think the level of relative outperformance for these stocks is sustainable. The high performance of such a tight group of companies has created an opportunity for active managers who are able to look beyond the benchmarks. We see 2024 as a year where the breadth of the market will widen and small, mid and large cap companies will be in the spotlight.
Exhibit 1: The Magnificent Seven and “The Rest” – The Bifurcation in US Stock Market Returns
US stocks continue to outperform many global markets
The United States is one of the largest and most diverse economies globally, driven by technological innovation, entrepreneurship, and a robust consumer market. In 2024, we think US economic growth and technology leadership could deliver better returns than other global equity markets. We continue to view the US stock market as a growth-focused economy compared to other regions around the globe.
Excitement around AI will continue to grow
We believe that generative AI represents the next big shift in the computing platform and is likely to be a multi-trillion dollar investment opportunity over the next decade. In 2024, we expect early AI applications to enter the market for consumer and enterprise use. In the long term, generative AI has the potential to accelerate productivity growth, drive margin expansion for many companies, and be a tailwind for economic growth.
While we remain alert to macroeconomic uncertainties, they do not drive the majority of our investment decisions. At Franklin Equity Group, we believe that active management is essential to moving quickly and successfully in today’s dynamic markets. We look for opportunities that can potentially deliver positive long-term results, even in a high interest rate environment. We have found opportunities in high-quality businesses driven by sustainable secular growth themes with competitive market-leading positions, strong financials and balance sheets with the ability to invest and grow through a variety of economic conditions.
What are the risks?
All investments involve risks, including the possible loss of principal.
Equity securities are subject to price fluctuations and potential loss of principal.
Active management it does not ensure profits or protect against market downturns.
Investment strategies which include identification of thematic investment opportunities, and their performance may be adversely affected if the investment manager does not correctly identify these opportunities or if the subject develops unexpectedly.
Concentrating investments in technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
To the extent that a strategy focuses on particular countries, regions, industries, sectors or types of investments from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a more diverse wide country. , regions, industries, sectors or investments.
1. Sources: Morningstar Direct, Standard & Poor’s, Russell. Indices used: S&P 500; Russell 1000 Growth. As of November 30, 2023. The indices are unmanaged and cannot be directly invested in. They do not include fees, expenses or sales charges. Past performance is not an indication or guarantee of future results.
2. The “magnificent seven” are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
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Editor’s note: The bullet points for this article were selected by Alpha’s research editors.