Can the 'Magnificent Seven' continue to dominate in 2024?

The so-called Magnificent Seven" — Amazon (AMZN), Apple (AAPL), Alphabet (GOOG, GOOGL), Nvidia (NVDA), Meta (META), Microsoft (MSFT), and Tesla (TSLA) — have dominated the S&P 500 (^GSPC) this year as investors scooped up shares of megacap tech names. Macro uncertainty, driven in part by the Fed’s aggressive interest rate hiking campaign, prompted investors to favor only a handful of stocks.

Looking ahead to 2024, ClearBridge Investments's Jeff Schulze expects market breadth to broaden.

"If we do have a soft landing, I think that money is going to move into those areas that have underperformed." Schulze said. "I think it's going to be more of a stock picker's market in 2024 than what we've seen this year."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

SEANA SMITH: The influence that the so-called Magnificent Seven has over the rest of the market is only getting bigger. These seven big tech stocks have surged over 75% this year. Now according to Goldman Sachs, these stocks make up almost 30% of the S&P 500's market value. Can this market domination continue into the new year?

We want to bring in Jeff Schulze. He's a ClearBridge Investments strategist. Jeff, it's great to see you.

So we have seen this massive run-up in stocks. You have the NASDAQ coming off at eight straight days of gains. What do you think about this rally? Can it last into the new year?

JEFF SCHULZE: Well, first off, thanks for having me on the program. And I do think that this rally will continue. You don't have any major economic release that can change the momentum until we get December's payroll print. So at least over the next three weeks, I think the path of least resistance is higher.

But more importantly, I think there could be sustainability in this rally in 2024 because over the last month, you've seen a lot of movement away from the Magnificent Seven and into the more neglected areas of the market, like small cap, like lower quality. And the equally-weighted version of the S&P 500 is outperformed the cap weighted version by 4% because of this dynamic. And when you have really strong participation, strong breadth, and the percent of companies over the 200-day moving average for the S&P 500 is at the cycle highs right now at close to 80%, that is a really good sign that momentum can continue into the new year. So this rotation away from the Magnificent Seven is actually a good thing for longer term returns.

BRAD SMITH: It seemed like, Jeff, so much of the driving catalysts for the Magnificent Seven was around generative AI. What that could do for margins for these businesses. How much of that continues into 2024, from your perspective, as a primary catalyst versus other parts of the business that need to show investors that they're able to still continue to grow?

JEFF SCHULZE: Well, I think that the catalysts are still there. But there's just a lot of economic-- there's a lot of optimism that is priced into these stocks at the moment. And I think-- although they move-- may move up in an absolute basis, on a relative basis, if we do have a soft landing, I think that money is going to move into those areas that have seen the relative performance that we've seen out-- from outperformance perspective over the last month. So I think the catalysts are still there. But I think it's going to be more of a stock picker's market in 2024 than what we've seen this year.

SEANA SMITH: Jeff, how much of this hinges on the Fed cutting, because we heard from Mester, we heard from Daly of the Fed both saying that the market is betting on rate cuts happening still too early?

JEFF SCHULZE: Well, I think a lot of it is contingent on the Fed cutting. Now importantly, I think that first rate cut will come in March. So we're not going to get that first rate cut for a while. But importantly, I think it comes back to the fact of whether or not the economy can have a soft landing, or whether recession risk is still out there.

Now even if the Fed does cut in March, it doesn't preclude a recession from materializing because when you went into the 2007 recession, the Fed had cut 100 basis points by the time that recession had started. When you went into the 1990 recession, the Fed had cut by 175 basis points. So while this does increase the odds of a potential soft landing that the Fed is looking at both sides of their dual mandate, price stability and full employment, I think that the real driver of whether or not this momentum can continue is the economy. Will recession materialize, or will it just be below trend growth?