3 Key Takeaways:
- Market confidence has rebounded following the election and improved global stability, but stock gains remain uneven.
- A handful of massive companies, the “Magnificent 7,” continue to dominate returns, creating an unsustainable market concentration.
- Bonds, once overlooked, are now presenting more attractive opportunities for investors.
A Market Rebound, But Not for Everyone
Since our last update, the mood in financial markets has changed dramatically. A few months ago, investors were uncertain, even though the economy was strong. Now, confidence has returned. The election is over, the transfer of power went smoothly, and global tensions have eased with a ceasefire in the Middle East. As a result, the stock market is gaining momentum again.
The AAII Investor Sentiment Survey, which measures how investors feel about the market, has turned positive. Wall Street experts, who were cautious before, are now more optimistic. However, while stocks are rising, not everyone is benefiting equally.
Over the past two calendar years, the S&P 500 has gained more than 20% per year, marking the best back-to-back performance since 1998-99. But if we remove the biggest companies and look at the average stock, the numbers tell a different story. The S&P 500 Equal Weight Index, which treats all 500 stocks equally, has only gained about half as much. This shows that just a few big companies are driving most of the market’s success.
The Rise of the “Magnificent 7”
A small group of companies—Apple, Microsoft, Nvidia, Alphabet, Meta, Tesla, and Amazon—has played a huge role in these gains. Known as the “Magnificent 7,” these stocks jumped 78% in 2023 and another 48% in 2024. Together, they are now worth $18 trillion, making up 34% of the entire S&P 500.
To put that into perspective, the entire Chinese stock market is worth only $12 trillion. This level of dominance is unusual and raises concerns about how long it can last.
The main reason for this imbalance is how the S&P 500 Index is structured. Unlike the Equal Weight Index, where every company has the same influence, the traditional S&P 500 gives more weight to bigger companies. That means if Amazon (worth $2.5 trillion) rises 50%, it has a much bigger impact than Charles Schwab (worth $150 billion), even if Schwab’s stock also rises by the same amount.
Even though these tech giants remain strong, history shows that market leaders don’t stay on top forever. Relying too much on a handful of companies for stock market growth comes with risks.
Bonds Are Becoming More Attractive
While stocks have been in the spotlight, the bond market has also been changing. After the election, the interest rate on 10-year U.S. Treasury bonds increased. Some people worried this was a sign of inflation expectations rising. However, another explanation is that higher interest rates reflect strong economic growth expectations.
The yield curve (which is comprised of short, medium and long-term interest rates) has also shifted. While short-term rates remain high, long-term rates are climbing, showing that investors believe in the economy’s future strength. Still, the Bloomberg Aggregate Bond Index fell 3.1% in the fourth quarter and ended the year with just a 1.2% gain.
Why Bonds Are More Appealing Now
For years, low interest rates made bonds less attractive. That’s changing:
- 10-year Treasuries now pay 4.5%, making fixed-income investments much stronger.
- We expect bonds returns to grow faster than inflation in the coming years.
- Investors looking for stability and income may find bonds a great option.
For most of the last decade, bonds didn’t offer good returns. But with higher interest rates, they now provide better returns than they did just a year ago. This is great news for fixed-income investors who want a lower risk investment that should grow its purchasing power with time.
What This Means for Investors
With market optimism back, many investors feel tempted to chase big stock gains. However, history shows that when stock prices rise too quickly, future returns are often underwhelming. Large-cap stocks are currently expensive compared to historical averages, which could mean more moderate growth ahead. This doesn’t mean stocks will fall, but it’s important to manage expectations—just because stocks have risen doesn’t guarantee they’ll continue climbing at the same pace.
When excitement runs high, investors sometimes overpay for stocks, leading to disappointing returns later. That’s why diversification remains key. A well-balanced portfolio that isn’t overly concentrated in a single sector or a handful of big names can help reduce risk. Bonds, which many have overlooked in recent years, are now a valuable tool for stabilizing portfolios and generating steady income.
As we begin a new year, we remain optimistic about the economy but recognize that markets move in cycles. The best strategy is to stay patient, focus on long-term goals, and avoid getting caught up in short-term hype.
Key Principles for Long-Term Investing:
- Focus on fundamentals. Short-term gains can be tempting, but strong financial principles drive lasting success.
- Stay diversified. A balanced portfolio helps manage risk, especially when markets become unpredictable.
- Avoid emotional investing. Making decisions based on excitement or fear often leads to mistakes.
By staying disciplined and maintaining a long-term perspective, investors can navigate market cycles with confidence and stability.
We wish you a happy and healthy New Year and look forward to updating you again in the spring.
