Gap between Mag 7, rest of market is 'narrowing' in late 2024

As the Russel 2000 index (^RUT) rallied in July, investors braced for a market rotation away from Big Tech and the Magnificent Seven into small-cap stocks. Edward Jones senior investment strategist Angelo Kourkafas joins Catalysts to discuss the latest market volatility (^VIX) and what investors can expect in the second half of 2024.

"The broadening of market leadership will remain a prevalent theme in the remaining months of the year. We have a resilient economy, which means that there is still growth. And we know there's a big valuation gap between the [S&P] 493 and the Magnificent Seven. And when we look at earnings, which is one of the fundamental drivers of stock prices, the gap between the Magnificent Seven and the rest of the market is starting to narrow, especially as we look at Q3 and Q4," Kourkafas explains.

He expects volatility to continue as Wall Street heads into a "seasonally challenged part of the year" and an election season. While volatility may increase closer to the November election, he notes that it historically has quickly subsided. He encourages investors to see upcoming pullbacks as buying and diversification opportunities. While small caps grew considerably in July, Kourkafas favors mid-cap stocks as they have "more exposure to positive economic surprises and has a valuation advantage over large caps."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

And I want to talk about how your positioning around that thesis right before we saw that volatile week with the sell off the new narrative was one of a market rotation out of big tech and into the other 493.

Does today's data support a continuation of that rotation?

And is it into 493?

Or is it into small caps in the Russell 2000?

Yeah, I think so.

The broadening of market leadership will remain a prevalent theme in the remaining months of the year.

We have a resilient economy, which means that there is still growth.

And we know there's a big valuation gap between the 493 and the Magnificent seven and we look at when we look at earnings, which is one of the fundamental drivers of stock prices.

The gap between the Magnificent seven and the rest of the market is starting to narrow, especially as we look at Q three and Q four.

And that's part of tough comparisons for the Magnificent Seven plus for the remainder companies.

We have, uh uh still positive economic growth, and after earnings stalling for more than a year now, they are bouncing back with the rebounding margins are, some of the price pressures are easing.

So, Angela, what do you think that tells us, then?

About the likely action we're going to see as we look ahead to?

Obviously, we typically do see a little bit more vol.

Volatility leading up to the US election.

How should investors, or what should investors then be doing over the next several weeks to better position their portfolios?

Post election?

Yes, I think having the the right expectations about returns in volatility is important because we are, as you mentioned in a seasonally silenced part of the year, thinking about late August, September October, especially in an election year.

We tend to see volatility looking at the fixed index spike.

But that spike, that uncertainty that is associated with the the election we have seen historically very quickly subsides.

So if we do have an election driven pullback inequities given the relatively favourable backdrop, we would use those Pullbacks as an opportunity to to either diversify, deploy some some some capital, uh, and be opportunistic.

While this this happens and going back to the point about small caps, I think mid caps is a compelling part of the market.

It is more level, more exposure that has more exposure to post economic surprises and has evaluation advantage over the large caps.

But at the same time, it is higher quality than than some of the small cap stocks.