There was a huge rise in the U.S. stock market in 2024, but things have gone wrong in December.
As a result, investors have gone back to what they know how to do: buying up shares of megacap tech giants. People have long called these stocks the “Magnificent Seven,” but since Broadcom Inc. shares recently climbed above $1 trillion in market value, they have been given a new name: the “BATMMAAN stocks.”
Broadcom is in the group, along with the seven original Magnificent Seven companies: Nvidia Corp. (NVDA) -2.09%, Tesla Inc. (TSLA) -4.95%, Amazon.com Inc. (AMZN) -1.45%, Microsoft Corp. (MSFT) -1.73%, Meta Platforms Inc. (META) -0.59%, Apple Inc. (AAPL) -1.32%, and Alphabet Inc. (GOOGL) -1.45%. Even though the rest of the U.S. market has been struggling over the past month, shares of these eight companies have kept going up, building on the gains made after Donald Trump won the election on November 5.
Dow Jones Market Data says that since the election, the group’s total market capitalization has grown by more than $1.9 trillion, even though there was some trouble at the end of last week. That’s the same as more than 85% of the rise in the market value of the S&P 500 during that time.
At first, Trump’s win sparked a broad post-election rally. Value stocks, such as financials, and small-cap stocks, along with megacaps, such as Tesla, all went up. Financials and other stocks that had gone up after Trump’s victory have lost some of their value since the beginning of December.
As the last two trading days of the year approached, sector success in December looked a lot like it did in 2023. As of Friday, only three of the 11 categories that make up the S&P 500 were positive for the month: communication services, consumer discretionary, and information technology. Each of the eight stocks in “BATMMAAN” is in one of those three groups.
The S&P 500 index looks like it will lose money this month, but the Nasdaq Composite, which is much more dependent on the Big Tech megacaps, is up about 2.5% as of Friday’s close, according to FactSet data. This month has also been tough for the Dow Jones Industrial Average, which has now had its longest losing run since the mid-1970s.
Since at least the end of 1999, this was the longest stretch of negative breadth for the S&P 500. This is when the number of members falling on a given day was higher than the number rising.
MarketWatch talked to George Cipolloni, a portfolio manager at Penn Mutual Asset Management, on Friday. “After the election, we had a nice broadening out of the market.”
“These stocks did well for a few weeks, but then the market went back to being very concentrated.”
In turn, this means that the U.S. market is on track to end the year at a level that is in some ways the most crowded it has been in recent memory. Apollo’s Torsten Slok says that the combined weight of S&P 500 stocks that make up at least 3% of the whole index recently hit its best level since at least the early 1990s.
Five names are in that group: Apple (7.2%), Nvidia (6.3%), Microsoft (6%), Alphabet (4.4%), and Amazon (4.4%).
A lot of bulls say that these megacap stocks deserve to be worth so much more. That’s an easy case to make for Nvidia and Broadcom, whose sales and earnings have grown very quickly over the last two years.
Citoloni said that some companies in the group, like Apple and Tesla, aren’t growing nearly as fast.
Because these stocks are valued too high, they could fall in value in the new year if they don’t meet expectations or if investors lose faith in AI’s ability to significantly increase workers’ output in the near future 1.
According to Slok, investors should be aware that the S&P 500 doesn’t offer as many chances for diversification as it used to because a few stocks have lost so much of their power.
He said, “When you put all your eggs in one basket, you have to watch that basket.”
Give me the cash.
There is no doubt that the stock market has seen a lot more growth in 2024 than it did in 2023. As of Friday, FactSet data showed that 10 of the 11 sectors that make up the S&P 500 were on track to end the day higher.
Stocks in the small and midcap categories that had a rough start to the bull market have also done better, though they are still behind their large-cap peers.
This general rise has helped bring the S&P 500 very close to a rare feat: for the first time since 1998, the large-cap index is on track to post a total return above 25% for the second year in a row. The total return includes earnings and any price growth for the stocks that make up the index.
Wall Street thinks the rise will go on in 2025, though probably at a slower pace.
But important questions still need to be answered. Outside of megacaps, earnings have been pretty stable for the past two years. There is finally hope on Wall Street that the other 493 companies in the S&P 500 will grow a lot in 2025.
But investors may not be as excited about earnings growth as they were before because Treasury prices are going up. This is one of the main reasons why the market was weak in December, Cipolloni said. People might not put more money into companies other than megacaps if interest rates go up. This is because megacaps are thought to be the most resistant to interest rate increases.
Since the Federal Reserve cut its policy interest rate goal by 50 basis points in September, the yield on the 10-year Treasury note TMUBMUSD10Y +4.594% has gone up by about 100 basis points. According to statistics from FactSet, this has kept yields around their highest levels since the beginning of May.
On the other hand, investors might start to wonder if the high values some of these companies enjoy are really justified by the rise of AI.
So far, buyers have been willing to pay more for BATMMAAN stocks because the company has put a lot of money into AI infrastructure. As of now, the AI trend has helped Nvidia make a lot of money. Many of AI’s improvements have yet to make money, though, except for chip designers.
Burns McKinney, a portfolio manager at NFJ Investment Group, said that buyers might start to want more proof that these investments will pay off next year.
“We’ve been giving some of these AI stars credit for a while now,” he said. When asked by MarketWatch, he said, “That’s kind of what I mean when I say they need to’show me.'”
If they don’t, buyers might move their money to value stocks and other parts of the market where prices are more appealing.
“Everyone loves a story about someone coming back,” he told MarketWatch by phone.
Nobody thinks that the AI trade will lose a lot of money in the end, even if it goes through a rough patch.
McKinney said that a Fed that is willing to lend money and Trump’s plans to cut taxes and loosen rules should help the rise last until 2025.
The facts show that stocks are expensive, but the policy environment is very good, he said.
In the U.S., there isn’t much going on next week because investors are getting ready for the New Year’s Day break. The most important things could be new numbers on weekly initial jobless claims and the ISM industrial sector activity index.
Even though U.S. stocks went down on Friday, the S&P 500 SPX -1.11%, the Nasdaq Composite COMP -1.49%, and the Dow Jones Industrial Average DJIA -0.77% all ended the week with wins.
