A Year of Market Dominance: The Rise of Tech Giants
2024 was a remarkable year for the stock market, with the S&P 500 surging over 27% as the bull market continued its upward trend. A significant portion of these gains can be attributed to the “Magnificent Seven” – a group of tech and artificial intelligence companies with market caps ranging from $1.5 trillion to $3.8 trillion.
The Magnificent Seven: A Force to Be Reckoned With
These mega-cap companies have a profound impact on the broader S&P 500 index, and almost all of them enjoyed substantial gains in 2024. In fact, the average performance of the Magnificent Seven was close to 69%, outperforming the broader market. This is particularly noteworthy, given that these companies account for roughly a third of the value of the market-cap weighted S&P 500 and more than 50% of the value of the Nasdaq Composite.
The Evolution of the Magnificent Seven: Enter the Fateful Eight
Recently, the On The Tape podcast coined a new term – the “Fateful Eight” – which includes the original Magnificent Seven, plus chipmaking and software giant Broadcom. With a market cap surpassing $1 trillion, Broadcom’s stock has skyrocketed over 45% in the past month.
Forward Earnings Ratios: A Cause for Concern?
As we look ahead to 2025, forward earnings ratios for the Fateful Eight companies are quite lofty, with Tesla standing out from the pack. Alphabet and Meta Platforms, on the other hand, appear more reasonably valued. This has led many market watchers to question whether the major indexes will perform well next year, given the significant weight of these eight companies.
What’s in Store for 2025?
While most Wall Street analysts expect the market to continue performing well in 2025, albeit not as strongly as in the past two years, there are concerns about inflation and Treasury yields. The Federal Reserve’s projected interest rate cuts and President-elect Donald Trump’s policies may also impact the economy. However, better labor market data or Consumer Price Index numbers could lift stocks, particularly those in the tech sector.
A Turbulent Year Ahead?
I expect the market to experience turbulence in 2025, and while the Fateful Eight may still end the year at higher levels, I don’t anticipate them delivering the same level of returns as in 2024. Elevated valuations, tougher earnings comparisons, and economic challenges will likely weigh on these stocks.
Investing in the Fateful Eight: A Word of Caution
Before investing in Broadcom or any other Fateful Eight company, it’s essential to consider the bigger picture. While these stocks may still have room for growth, it’s crucial to diversify your portfolio and consider other investment opportunities. The Motley Fool’s Stock Advisor team has identified what they believe are the 10 best stocks for investors to buy now – and Broadcom wasn’t one of them.
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