Excluding top tech behemoths, US market grew almost zero in 2023

Tech behemoths drove 2023’s US market

Year-end review

As the year comes to an end, let’s examine the performance of U.S. stocks in 2023. Let’s talk about the key points first: As the title says, the U.S. stock market will have zero growth in 2023 excluding the top ten technology stocks. Among them, the magnificent 7 stocks are the most critical and are also the protagonists of this article.

Investors should not be too surprised. In fact, this phenomenon has already been shown in mid-June 2023. All the gains in U.S. stocks in 2023 have actually ended as early as mid-June 2023 after rebounding from last year’s sharp decline. If the gains and weights contributed by these ten companies are deducted, the S&P 500 Index actually fell as of mid-June.

This article will explore for you the reasons and the impact.

Related content from my book

I talked about it in sections 1-3 of my book “The Rules of 10 Baggers“:

• Among the constituent stocks of the S&P 500 Index, technology stocks account for 45%.
• In 2021, themagnificent 7 stocks account for 27% of the market value of the S&P 500 Index. In 2023, this number will rise to 29%.
• The magnificent 7 account for about 52% of the weight of the Nasdaq 100 Index.

Tech behemoths dominate U.S. stocks market

The three major indexes representing the U.S. stock market: the Nasdaq index, the S&P 500 index, and the Dow Jones Industrial Index. In addition to the Dow Jones Industrial Index, the market value, weight, and especially the increase have not been the same this year for a long time. It is a situation dominated by a few large technology giants.

In June 2023, the eight largest technology stocks in the United States accounted for nearly one-third of the market value of the S&P 500 Index; the combined weight of Apple and Microsoft, the top two largest by market value, rose to a new high of 14%! The S&P 500 is dominated by technology giants, and now nearly a quarter of every dollar invested in the S&P 500 index is shared by the top six companies.

The numbers speak for themselves. If these mega-cap stocks perform poorly, the U.S. stock market index will definitely not perform well, and vice versa. Because index investment will move the market trend, it is the leader of companies in related industries, guides the investment direction of large investment institutions, and affects the direction of US stock investors and financial media.

Why aren’t my U.S. stocks rising?

Most U.S. stock investors, at least the U.S. stock investors I met in Taiwan, have been complaining all year long: Watching the financial news, the U.S. stocks are rising so much, why the U.S. stocks in my hand are not rising, but keep falling?

The information technology sector is the S&P’s best-performing sector in 2023, with an annual return of 56.8%, followed by the communications services sector, which has surged 55.1% this year. If the majority of your holdings fall outside these two sectors, you’re unlikely to do well this year.

Note: What most people call technology stocks are actually mainly listed in the two sectors of information technology and communication services. For details, please see section 3-1 of my book “The Rule of 10 Baggers“.

Unless an investor’s U.S. stock portfolio consists mainly of the top ten technology stocks, or a very small number of real businesses and software or hardware stocks closely related to artificial intelligence, the chance of your U.S. stocks rising this year is very low. ; It would be a blessing if it doesn’t continue to fall.

Interest rate hike is nearing completion

The U.S. is accustomed to beggar-thy-neighbour

The size of the U.S. national debt is about US$33 trillion, and the U.S. currently has to repay US$1 trillion in interest per quarter on the national debt. But the United States has a “global unique” privilege. It can print U.S. banknotes, issue bonds, and force other countries to buy them–because countries’ foreign trade needs to be settled in U.S. dollars, and if you want to buy things from other countries, you must first buy U.S. dollars.

This is also the real reason why the United States has been printing money like crazy and never worried about the country going bankrupt. But the United States’ use of the dollar as a weapon has two side effects: it exports inflation to other countries, and it prioritizes the interests of Americans in everything it does.

Why are only megacap stocks rising?

There is no doubt that interest rate increases will cause the stock prices of listed companies to fall across the board, especially for small and medium-sized stocks, while the impact on very large stocks will be relatively small. There are many reasons, mainly because the moats of mega-cap stocks are very wide, and they are all cash kings. These two reasons alone allow these mega-cap stocks to survive the cold winter of interest rate increases.

In 2023, the gains in U.S. stocks will only be concentrated in about ten super-large technology stocks, mainly for this reason. In addition, these stocks have already had artificial intelligence products, which coincides with the artificial intelligence theme at the beginning of this year. In addition, investors are more daring to buy these relatively low-risk giants when they find dips. Other U.S.-listed companies have actually continued to fall this year.

Mega-cap stocks do perform better

But investors should not forget that the operating performance of these large-cap stocks can really exceed Wall Street’s expectations. Revenue and profits have indeed been affected, and a few stocks have even experienced negative single-digit revenue growth in the quarter.

However, if you look at other stocks besides these ten technology stocks, most of them continue to experience negative revenue growth every quarter. In addition, as the profit turns to loss, there are constant news of CEO stepping down, and layoffs and bankruptcies can be seen everywhere. collapse. Most of the listed companies in the U.S. stock market are surrounded by such an environment. Coupled with the impact of inflation and interest rate increases, it is normal for individual stock prices to fall sharply. It would be abnormal not to fall.

U.S. stock market outlook for 2024

The room for further interest rate hikes is limited

When will the US Federal Reserve stop raising interest rates? It won’t be long, because everything that needs to be upgraded has almost been upgraded. I personally believe that there is little chance of another interest rate hike, if any, and there is not much room for further increases.

If it rises too many times, companies will not be able to bear it, and the result will be a hard landing of the economy, business closures, and unemployment, which is contrary to the two major tasks assigned by the US Federal Reserve – to increase employment and stabilize prices.

According to data from the National Federation of Independent Business (NFIB), from August to October 2023, the average short-term loan interest rate for small businesses stood at 9%, which was higher than 6.7% in the same period last year and almost double the 4.6% level in August 2021. . The average loan interest rate was as high as 9.8% in September, the highest since December 2006.

Top ten tech stocks to big rise is impossible

Among the top ten technology stocks, a few may have one or two stocks. Investors cannot expect that all of them will have the same growth rate as in 2023 in 2024. This is a very unrealistic fantasy.

Just imagine, Apple, with a market capitalization of US$3 trillion, and Microsoft, with a market capitalization of US$2.6 trillion, have both risen by about 50% in 2023. If you hope that they will reach market values ​​of US$4.5 trillion and 3.9 trillion respectively by the end of 2024, it is not impossible, but this is The probability of this is really very low.

Some stocks have shown signs of light

According to the financial reports released in the third quarter of 2023, many leading stocks in different fields of the technology industry have actually shown “suspected” signs of rebounding from the bottom, or at least positive prospects and messages that they will no longer deteriorate. This was directly reflected in the stock price rising immediately the day after the financial report was released.

Most of these stocks are well-known large-cap stocks whose stock prices have hit bottoms repeatedly in the past two years, such as Intel (ticker: INTC) and TSMC (ticker: TSM) in the semiconductor industry, Disney (ticker: DIS), and PayPal in financial technology. (ticker: PYPL) and Block (ticker: SQ).

These are large listed companies in the US stock market that have always had positive cash flow, market capitalization of hundreds of billions of dollars, excellent long-term performance in the past, and considerable competitiveness. Just because investors are uncertain about the economic outlook, the company’s revenue is decelerating, and they doubt whether the company can return to the right track of operations during the bull market two years ago, and whether revenue and profits can regain positive growth momentum, they have continued to be sold in the past two years. And plummeted.

How should investors plan?

If investors are patient, they can hold onto or buy stocks that are truly competitive at dips. Because in fact, there are still many listed companies that have fallen too much, are in good health, and have not so bad operating performance, but have been mistakenly sold by investors, and they are all large and well-known companies with large market capitalizations, and have always performed well in the past. share. When interest rates begin to be cut, U.S. stocks will rebound, and the stock prices of these listed companies that were mistakenly sold will be the first wave of stocks to rebound.

Magnificent 7 determine the growth of U.S. market

What is magnificent 7?

The magnificent 7 include Apple (ticker: AAPL), Alphabet (ticker: GOOGL, GOOG), Microsoft (ticker: MSFT), Amazon (ticker: AMZN), Meta (ticker: META), Tesla (ticker: TSLA) and Nvidia (ticker: NVDA) — they account for 29% of the S&P 500’s weighting.

Note: Due to the importance of these seven technology companies, the English media generally refers to these seven technology companies after the best-selling Western movie “The Magnificent Seven” in the United States in the 1960s.

Comparison to the S&P 500 Index

Magnificent 7 are up 71% through November 2023, while the other 493 stocks are up only 6%; and the S&P 500 is up only about 19% in 2023. In short, the rise in these magnificent 7 is the driving force behind the rise in the major U.S. market indexes.

Share price performance

From 2013 to 2019, magnificent 7 grew at a CAGR of 15%, while the others grew at a CAGR of 2%. That margin has narrowed to 18% and 15% over the past two years, but Goldman Sachs expects margins to expand again in the coming years. Goldman Sachs expects the magnificent 7 to grow at a compound annual rate of 11% from 2023 to 2025, compared with 3% for the rest of the S&P 500.

These magnificent 7 have soared a total of 75% in 2023, and their market value has expanded to 30% of the market value of the S&P 500 Index. During the same period, the S&P 500 Index returned 23%, and the other 493 companies excluding these seven stocks returned only 12%.

These magnificent 7 have a forward price-to-earnings ratio of 33 times over the next 12 months, while the remaining 493 companies in the S&P 500 have a forward price-to-earnings ratio of only 21 times.

How is the net profit?

The magnificent 7’s net profit margin also performed well, with its 19% profit margin higher than the other companies’ 9.8%. Not to mention, the long-term EPS growth estimate for the magnificent 7 is 17%, compared with 9% for the rest of the index.

Why are only magnificent 7 rising?

The simultaneous rise of thesemagnificent 7 in 2023 is not caused by speculation or short-term capital conditions. The outstanding performance of their stock prices this year coincided with the rebound of their profit margins and revenue, the two indicators that investors care about most, faster than the weakness of other listed companies in the market. This is why only The real reason why they’re going up.

Individual stock performance

Stock price performance comparison table

The stock price performance of thesemagnificent 7 is shown in the table below.

Reasons for the sharp rise

• Meta is the worst-performing company in the S&P 500 Index in 2022, and a big stock price rebound in 2023 is a very reasonable performance.
• Nvidia is the manufacturer that currently has a monopoly on artificial intelligence chips. The supply of its products exceeds demand, its stock price has soared, and there is nothing surprising about its privately held fundamentals.
• The stock prices of Apple, Alphabet, and Amazon all fell into the bear market last year. This year, they performed better than most technology stocks. They have impenetrable moats, and almost all of them rebounded back to pre-bear market levels.
• In addition to performing better than most technology stocks, Microsoft also has a strong moat; first, because it owns nearly half of OpenAI, the most popular ChatGPT product in 2023, it has been immersed in the glory of artificial intelligence. Not only is it actively integrating artificial intelligence Copolot into all major products, the most rare thing is that it is one of the very few software companies that can really start to make money by relying on artificial intelligence functions.
• Because Tesla is a leading company in electric vehicles and continues to expand production capacity and vehicle types, it is not surprising that its stock price has performed well.

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