Four biggest investment trends (so far) of 2024

Booming demand for artificial intelligence stocks, led by the Magnificent 7, tops our list

The Standard & Poor’s 500 index is a snapshot of the overall market. Occasionally, however, that snapshot can get a little distorted. Investors must zoom in on just a few pixels to get a clearer view. And that’s exactly what’s happening today.

U.S. stocks are off to a strong start this year—the S&P has returned 6.7%—but the rally has been narrow. The gains have been driven by the so-called Magnificent 7—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla. Those stocks are up an average of 10.4%; minus Tesla, it’s 17.9%.

In his latest CIO Perspectives memo to TIAA clients, Niladri “Neel” Mukherjee and his team highlight the four investment trends having the biggest influence on portfolios thus far in 2024. (You can read the full CIO Perspectives for March hereOpens pdf.) The biggest story, according to Mukherjee, chief investment officer for TIAA Wealth Management, is the ongoing magnificence of the Magnificent 7—companies driving the artificial intelligence (AI) revolution and pushing the stock market to new highs. Other trends Mukherjee and team are watching: rising rates for taxable bonds, falling supply for municipal bonds and increased volatility for stocks and bonds alike.

Here's a summary:

  • 1. The Magnificent 7—plus a case for small caps

    Information technology continues to drive stock market performance, according to Robert Marshall, equity portfolio manager for TIAA’s Investment Management Group (IMG). The Magnificent 7 single-handedly drove S&P 500 returns in 2023—producing over 90% of the S&P 500’s upside—and this trend has continued into 2024. However much helium there may be around AI, Mukherjee’s team still sees opportunities. They do not see a replay of the late 1990s dot-com boom (spoiler alert: it ended badly). Back then, the tech-laden Nasdaq Composite Index had a sky-high price-to-earnings (P/E) ratio of 150. Today, it’s 48.1

    The Magnificent 7 are some of the largest companies in the world, but Marshall is similarly optimistic about small cap stocks—generally defined as stocks with market capitalizations between $250 million and $2 billion. Analysts expect earnings from the S&P 600 small cap index to outpace those of the large cap S&P 500. This implies small cap equities should outperform their large cap brethren, especially since small cap stocks are now about one-third cheaper as measured by P/E ratios (see chart). Marshall’s small cap enthusiasm does come with caveats though. It’s predicated on the Fed easing rates significantly, something that may not happen if inflation takes another turn higher. Also, if the Fed winds up cutting rates in response to a recession, not a soft landing, the odds of small caps outperforming grow smaller.

Small cap stocks are inexpensive relative to large caps

Small Cap Stocks Inexpensive vs large chart

Source: FactSet Financial Data & Analytics

  • 2. Rising rates for taxable bonds. Interest rates on Treasury bonds have moved higher this year. According to Bryan White, fixed income portfolio manager for IMG, the upward move reflects the shifting consensus among Fed watchers. At the end of December, the market was betting on the Fed cutting rates by 150 basis points. By February, expectations were down to 75 basis points, as inflation readings were coming in higher than expected. The beginning of 2024 has reinforced the narrative that inflation and interest rates are not on a linear path downward—which is why Mukherjee and team do not expect Fed rate cuts to start until the second half of the year. 
  • 3. A supply crunch for munis. For a third consecutive year, the municipal market has experienced dwindling issuance of new bonds, according to IMG tax-exempt bond portfolio manager Jill Richman. A big driver has been inflation and the resulting spike in interest rates, which delayed many municipal projects by making them more expensive.
  • Helping offset the supply crunch has been a corresponding drop in demand. Enticed by a strong equity market and spooked by falling bond prices (bond prices move in the opposite direction of rates), retail investors have reduced their allocation to munis. Municipal bond mutual funds experienced a record $144 billion in outflows in 2022 and an additional $17 billion in 2023. However, a shift in investor sentiment could become a tailwind for munis in 2024. Growing expectations for rate cuts later this year should incentivize investors to move money out of cash and into bonds. Consequently, municipal bonds could be poised for another year of solid returns and relative performance.
  • 4. Election-year volatility offers investors opportunities. Volatility is rising in both the stock and the bond markets. That’s no surprise, according to John Canally, IMG’s chief portfolio strategist, given that 2024 is an election year. From 1992 to 2020, volatility in U.S. stock and bond markets was higher in presidential election years, on average, than in non-presidential election years. Volatility tended to rise in the months leading up to the election, then move lower after Election Day. TIAA’s view is that these bouts of volatility may present buying opportunities in both stocks and bonds, at least for investors with excess cash and longer time horizons.

Click here to read the full CIO Perspectives for March.Opens pdf

1“The Nasdaq Composite Index: A fourteen-year retrospective,” Nasdaq OMX Group, April 2, 2014. wsj.com/public/resources/documents/nasdaqcompretrospective.pdfOpens pdf; Nasdaq Composite Index, Bloomberg L.P.

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Price/Earnings Ratio (P/E Ratio)The ratio of a stock's current price to its per-share earnings over the past year. For a fund, the ratio is the weighted average P/E of the stocks in the fund's portfolio. A forward P/E uses estimated earnings for the next four quarters in the denominator. P/E is often an indicator of market expectations about corporate prospects; usually, the higher the P/E, the greater the expectations for a company's future growth in earnings.

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