With
much
of
the
rally
in
US
stocks
being
driven
by
a
handful
of
mega-sized
companies,
some
market
watchers
have
been
sounding
the
alarm
about
the
durability
of
the
bull
market.
But
one
strategist
isn’t
concerned;
in
fact,
she
thinks
the
hype
is
warranted.
BlackRock
global
chief
investment
strategist
Wei
Li
points
to
exceptionally
strong
earnings
across
most
of
the
stocks
known
as
the
Magnificent
Seven,
especially
with
the
exponential
growth
of
artificial
intelligence
technology.
“As
I
look
ahead
to
this
year,
I’m
reasonably
comfortable
and
confident
that
the
earnings
picture
is
going
to
stay
quite
strong,
supported
by
tech
and
the
Magnificent
Seven,”
she
says.
The Morningstar
US
Market
Index is
up
7.2%
for
the
year
and
25.5%
since
its
October
2023
low.
These
gains
have
come
despite
the
prospect
of
the
US
Federal
Reserve
making fewer
interest
rate
cuts this
year
than
expected,
thanks
to strong
inflation and historically
high
valuations.
Markets
Soar
on
High
Earnings,
AI
Hopes
Much
of
the
returns
in
the
broad
market
have
come
from
the
stocks
known
as
the
Magnificent
Seven:
Nvidia (NVDA),
Meta
Platforms (META),
Apple (AAPL), Amazon.com (AMZN),
Microsoft (MSFT),
Alphabet
(GOOGL),
and
Tesla (TSLA).
Over
the
past
year,
the
group
has
been
responsible
for
33%
of
the
market’s
rally.
Since
the
beginning
of
2024,
Nvidia,
Microsoft,
Meta,
and
Amazon
account
for
just
over
50%
of
the
US
Market
Index’s
return,
according
to
data
from
Morningstar
Direct.
Magnificent
Seven
Stock
Performance
Source:
Morningstar
Direct,
Morningstar
Indexes,
March
15,
2024
Given
the
narrowness
of
the
rally,
along
with
the
less
supportive
economic
backdrop,
why
aren’t
markets
freaking
out?
Strong
earnings
from
the
Magnificent
Seven
mean
Li
isn’t
concerned
about
the
concentration
risk
that’s
had
many
watchers
wringing
their
hands.
For
investors,
“the
missing
piece
is
earnings”.
She
explains:
“Earnings
are
coming
through
very,
very
strong.”
In
the
fourth
quarter
of
2023,
earning
growth
for
US
stocks
was
more
than
double
analysts’
expectations.
The
results
are
even
more
dramatic
among
the
individual
stocks
of
the
Magnificent
Seven.
For
instance,
Nvidia’s
earnings
per
share
were
an
eyewatering
765%
higher
than
in
the
year-ago
period.
Many
analysts,
including
at
Morningstar,
say
this growth
can
continue because
the
firm’s
underlying
fundamentals
can
support
it.
A
Broad
Rally
Isn’t
Always
a
Good
Thing
Li
has
an
answer
for
investors
and
pundits
who
worry
about
the
dominance
of
a
relatively
small
group
of
stocks.
In
the
period
before
the
covid-19
pandemic,
the
Fed’s
quantitative
easing
policy
(wherein
it
pumped
money
into
financial
markets
through
bond
purchases)
bolstered
investor
confidence
after
the
chaos
of
the
financial
crisis.
That
infusion
of
liquidity
and
the
attendant
long
period
of
low
interest
rates
meant
money
was
cheap
and
stocks
soared.
“A
rising
tide
was
lifting
all
boats,”
Li
says,
including
smaller
firms
whose
fundamentals
weren’t
strong
enough
to
justify
those
gains.
“That
was
a
broad-based
rally.”
She
says:
“Does
that
make
you
more
secure
and
comfortable
that
everything
was
going
up,
including
companies
that
maybe
shouldn’t
be
going
up
and
maybe
shouldn’t
exist?
I’d
rather
the
market
be
supported
by
good
fundamentals,
and
if
these
fundamentals
are
concentrated
in
a
few
names
compared
to
a
broad-based
rally,
that’s
fine.”
Li
is
confident
that
the
forces
driving
a
few
stocks
higher
today
–
like
artificial
intelligence
in
tech
and
GLP1s
in
healthcare
–
have
long
runways.
If
investors
can
feel
comfortable
with
that
too,
she
says,
“then
the
concentration
is
a
feature,
not
a
bug”.
Today’s
Market
is
No
Dot-Com
Bubble
In
recent
months,
some
analysts
have
sounded
the
alarm
over
similarities
between
the
enthusiasm
for
AI
and
the
dot-com
bubble
of
the
early
2000s,
which
sent
stocks
plummeting
when
it
burst.
Li
says
this
comparison
isn’t
apt.
AI
stocks
are
rising
quickly,
but
so
are
earnings
expectations
and
(most
critically)
realised
earnings.
In
other
words,
AI
companies
like
Nvidia
and
Microsoft
are
living
up
to
the
hype.
“It’s
very,
very
different
from
back
then,”
she
says.
Not
to
mention
that
AI
is
in
its
early
stages.
“We
think
advances
from
here
are
likely
to
be
exponential
as
innovation
snowballs,”
BlackRock
strategists
wrote
in
their
2024
outlook.
“We
see
the
tech
sector’s
earnings
resilience
persisting
and
expect
it
to
be
a
big
driver
of
overall
US
profit
growth
in
2024.”
Inflation
Could
Threaten
Earnings
Li
says
interest
rate
shocks
could
be
one
of
the
biggest
risks
to
market
sentiment.
While
she
believes
markets
may
be
pleasantly
surprised
by
inflation
that
falls
more
quickly
than
expected
in
the
coming
months,
they
could
stumble
if
the
path
downward
continues
to
be
bumpy.
Bumpy
inflation
could
also
threaten
the
robust
earnings
that
have
underpinned
the
market’s
seemingly
unstoppable
rally.
Li
says
she’ll
be
looking
for
early
indicators
of
margins
contracting
as
a
sign
that
softer
numbers
might
appear
in
quarterly
earnings
reports.
“How
margin
develops
will
be
key.”
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