The Unstoppable Magnificent Seven

In the year 2024, the “Magnificent Seven” stocks continue their impressive streak without showing any signs of slowing down. While U.S. large-cap equities remain strong and concerns about higher interest rates start to ease, investors are urged to explore beyond these familiar territories.

Diversifying for Future Growth

According to a team of strategists from UBS Group’s wealth-management arm, tapping into international and small-cap stocks can offer investors a way to diversify their portfolios and potentially discover new avenues for growth. Solita Marcelli, the chief investment officer for the Americas at UBS Global Wealth Management, highlighted the importance of maintaining exposure to other developed markets, emerging markets, and small-caps alongside U.S. large-caps.

Record Highs in U.S. Markets

While U.S. stocks continue to dance around record highs, the S&P 500 and the Dow Jones Industrial Average have been setting new milestones in 2024. The S&P 500 marked its 13th record finish this year, with the Dow Jones Industrial Average notching its 14th record closing high. The Nasdaq Composite also came close to hitting a new record high, reflecting the ongoing stock rally fueled by companies like Nvidia Corp.

Lagging Performance in International and Small-Cap Stocks

Despite the remarkable performance of U.S. stocks, the same cannot be said for international stocks and smaller U.S. companies. The MSCI All Country World ex-US index has only gained 1.6% year-to-date, significantly lower than the 6.6% rise in the S&P 500 over the same period. Additionally, the small-cap Russell 2000 index is flat for the year, trailing behind larger counterparts after a sluggish 2023.

Looking Ahead

Historically, market leadership has shifted over time, and investors should remain vigilant for potential changes in performance trends. As the global market landscape continues to evolve, staying open to diverse investment opportunities can be key to capturing future growth drivers.

The Evolution of Global Stock Performance

Since 2007, the S&P 500 has been dominating global stocks, but looking back a bit further to the period between 1999 and 2007, it only saw a 38% return. In contrast, the MSCI EAFE index EFA experienced a 97% increase, and the MSCI Emerging Markets index EEM soared by 420% during the same timeframe, according to data gathered by UBS Global Wealth.

Potential Shifts on the Horizon

Despite the current landscape, a potential “shift in regime” could be looming on the horizon. Should such a rotation occur, international stocks that have been trailing behind in recent years may stand to benefit, as highlighted by Marcelli and her team.

Factors Driving Global Stocks

To add fuel to the fire, the possibility of interest-rate cuts by major central banks worldwide and expectations of a soft landing for the U.S. economy in 2024 are providing significant support for global stocks and small-cap equities, according to UBS strategists.

A historical analysis since 1989 reveals that emerging-market stocks have typically delivered average total returns of 10% and 20% in the six- and twelve-month periods following the initial interest-rate cut by the Federal Reserve. This trend is largely attributed to the faster impact of easing financial conditions on smaller companies due to their higher utilization of floating rates in their debt structures.

Valuation Discrepancies

A key point to note is the discrepancy in equity valuations between U.S. and international markets. Based on their 12-month forward price-to-earnings (P/E) ratios, stocks outside the U.S. appear significantly cheaper. The MSCI EAFE index is currently trading at 13.7 times forward earnings, while the MSCI Emerging Markets index stands at 11.6 times forward earnings, compared to the S&P 500’s ratio of 20.4, as per FactSet data.

Market Update

On a more immediate note, U.S. stocks showed slight gains on Monday with the S&P 500 and Dow industrials holding steady, while the Nasdaq Composite crept up by 0.2% during early-afternoon trading, according to FactSet data.

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