The S&P 500 has enjoyed a stellar 17% rise in 2024, yet beneath the surface, a tale of two markets unfolds. While the “Magnificent Seven” tech giants, fueled by AI fervor, bask in the limelight, the remaining 493 stocks have quietly endured an “earnings recession.” But change is in the air.
Nvidia alone, the AI darling, powered over a third of the S&P 500’s gains by late June. The rest? Mostly flat or declining earnings since late 2022. Bank of America’s data reveals a stark divide, with the “S&P 493” experiencing zero year-over-year growth until now.
But the second quarter of 2024 may herald a turning point. Forecasts predict a 6%-13% earnings growth for these unsung heroes through the year’s end. Still, they’ll likely trail the overall index, as the AI-driven tech and communication sectors continue their impressive 25%-53% quarterly surges.
This bifurcation has left some on Wall Street dismayed. The hoped-for broadening of the market rally hasn’t materialized, and fundamentals like earnings growth explain why.
Piper Sandler’s Michael Kantrowitz highlights a curious phenomenon: the correlation between the S&P 500 and its individual stocks is nearing a 25-year low. If the index no longer represents the “market,” what does it even mean?
The End of the AI Monopoly?
The frustration with this AI-dominated landscape mirrors a celebrity-obsessed culture. But as history shows, such peaks often precede a shift. Could we be on the cusp of a new chapter, where the “rest” of the market finally captures investor attention?
The data suggests this is plausible. As the earnings recession lifts and growth becomes more widespread, investors may seek opportunities beyond the AI giants. Sectors like healthcare, with double-digit earnings growth projected (though partially due to one-time items), could become alluring alternatives.
The S&P 500 story has been about contrast: AI’s dazzling ascent juxtaposed with a stealth recession among the majority. But change is brewing. Whether the market rally broadens as anticipated remains to be seen, but the stage is set for a fascinating turn of events. So, fasten your seatbelts and stay tuned! The S&P 500’s drama is far from over.