There’s more to the 2024 market rally than just growth stocks.
Despite holding a lower weighting in red-hot growth stocks like Nvidia (NASDAQ: NVDA), the S&P 500 has been soaring as the market rally has broadened beyond growth stocks to include traditionally safe and stodgy sectors.
Here are five reasons why the S&P 500 is outperforming the Nasdaq Composite and Dow Jones Industrial Average in 2024 and what it means for your portfolio.
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1. Weakness from the Magnificent Seven
The “Magnificent Seven” is a term used to describe seven tech-oriented companies that put up massive gains in 2023. Although most of the group got off to a strong start this year, the majority of the Magnificent Seven stocks are now underperforming the S&P 500 year to date.
The Nasdaq Composite has a higher weighting in every Magnificent Seven component than the S&P 500, so it has benefited more from the outperformance in standouts like Nvidia and Meta Platforms. However, a lot of growth stocks have begun to cool off as investors take a closer look at valuations and question if earnings growth can support higher multiples.
2. Valuation concerns
In general, the Nasdaq Composite tends to have a higher price-to-earnings (P/E) ratio than the S&P 500 and the Dow because many components are valued more on where their earnings will be years from now than where they are today. For example, Microsoft (NASDAQ: MSFT) has far more opportunities for earnings growth than a stodgy stalwart like Coca-Cola, so Microsoft deserves a more expensive valuation.
But at a certain point, investors may question if earnings growth can live up to expectations or if the disparity between value stocks and growth stocks is too great. Even now, the Invesco QQQ Trust, which mirrors the performance of the 100 largest non-financial companies listed on the Nasdaq Stock Exchange (known as the Nasdaq 100), has a 37.8 P/E ratio compared to 27.8 for the SPDR S&P 500 ETF and 24.3 for the SPDR Dow Jones Industrial Average ETF.
So if the earnings growth rate of Nasdaq stocks slows due to a downturn in the business cycle or any number of unforeseen factors, the Nasdaq could continue underperforming the S&P 500 because it is valued more on future earnings than historical earnings.
3. Other sectors are playing catch-up
2024 has been the year of catch-up for many beaten-down sectors. In mid-August, the best-performing Vanguard ETF in 2024 was the Vanguard Utility ETF. Other stodgy sectors like consumer staples, financials, and healthcare have also done well. The market rally has broadened beyond growth stocks — which can happen when certain sectors look too cheap compared to the rest of the market.
It’s also important to remember that the market hates uncertainty. With the stock market hovering around all-time highs, recession fears, and an upcoming election, investors may gravitate toward safer pockets of the market in the short term. Sept. 3 was a perfect example of this behavior, as the Nasdaq Composite sold off over 3% and the S&P 500 was down over 2% — and yet — the consumer staples sector was up 0.7%, and utilities and healthcare were essentially flat.
4. Strong performances from megacap value stocks
Growth stocks dominate the weightings of the broader indexes, with the tech sector making up 31% of the S&P 500. The influence is even greater considering companies like Amazon, Tesla, Meta Platforms, and Alphabet aren’t technically in the tech sector.
But as of late, there have been strong performances from sizable companies that clearly aren’t in the tech sector. Take, for example, Berkshire Hathaway, JPMorgan Chase, Walmart, and Coca-Cola — four industry-leading companies with a combined market cap over $2.5 trillion that are all crushing the broader indexes so far this year.
It’s not that the results of these companies have been particularly strong, but rather, that they’ve been good relative to investor expectations and valuations. Walmart is the best-performing stock in the Dow Jones Industrial Average in 2024 because it was undervalued going into the year and because it is growing modestly while so many of its peers are struggling.
5. Gravitating toward “safe stocks”
Another advantage of many stodgy companies is that they can do well during periods of slowing economic growth or even recessions.
In a slowdown, consumers may cut spending on discretionary goods, businesses may cut spending on Nvidia chips, and industrial companies may pull back on new equipment investments. But demand for electricity, gas, and water provided by utilities, healthcare services, Coca-Cola’s products, or detergent brands owned by Procter & Gamble is likely to be just fine.
Many megacap value stocks also pay dividends, which can be a way to generate income without the need to sell stocks on the cheap.
Filter out the noise
Understanding what’s driving the broader indexes can help you make sense of stock market movements. It can also explain why your portfolio’s performance can vary wildly from an index like the S&P 500.
When initiating a new position in a company, adding to an existing holding, or simply holding a stock through periods of volatility, it’s helpful to know how much of that company’s valuation is based on fundamentals and how much is driven by animal spirits. Or as Morgan Housel talks about in his book, The Psychology of Money, the stock market is one playing field upon which many games are being played at once.
Traders may drive up a stock price or beat another stock down based on knee-jerk reactions, while others are playing the long game and seeking to invest in quality companies that can compound over time. The power of compounding is why long-term investing is a winning strategy. When looking at how to position your portfolio, make sure to stick to your principles while also being aware of the noise so you aren’t caught off guard by volatility.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, and Walmart. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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