Written by: Eugene Peroni | Peroni Portfolio Advisors
Just two months into the new year, investors may be wondering whether 2024 will be a repeat of last year with the continued strong performances of artificial intelligence (AI) stocks.
The dominance of tech stocks in 2023 skewed the results for the major indices but also masked burgeoning leadership trends in the fourth quarter that could potentially shape 2024, presenting a considerably different profile that promotes more balanced performances. The turning point began to take form shortly after the market bottomed in October. The improving price architecture and net-money flow characteristics that emerged late last year may have indicated something more than fleeting knee-jerk reactions following the market lows. While most oversold sectors tend to advance initially amid a nascent recovery, the formations that developed in November presented more formidable foundations and potentially longer lasting and more durable trends. When considering the consistent relative strength strides in a growing number of individual stocks and their representative sectors and themes, I believe there is substantial evidence of solidifying broad-based leadership beyond the red-hot technology area.
I am observing an improving depth of individual stock leaders in a number of categories well beyond AI and Technology. For instance, since the fourth quarter lows, a substantial roster of sectors have sported a growing number of stocks approaching or reaching 52-week highs. These include Consumer Discretionary, Health Care, Industrials and Materials. The consistently improving trends in these areas have not come at the expense of Technology. But, while I do not believe AI stocks are dangerously overbought or priced for perfection, they are far from undiscovered and under-loved. They could be gradually moving toward “crowded trade” status — a syndrome that might pose increasing volatility and heightened risk for this aggressive growth category.
Unlike last year when the NASDAQ trounced the S&P 500, these two indices are posting similar results so far in 2024. I anticipate this dead-heat performance will continue amid market rotation, portfolio rebalancing and the market’s self-policing of price and sentiment excesses. I also expect growth will continue to lead but strategic diversification among growth and value could enhance overall results. A notable trend in the market is the selectively improving price trends in medium and smaller capitalization stocks representing the above-mentioned sectors. This reflects improving investor confidence and higher conviction regarding the growth prospects for the U.S. economy. It also implies investors are less worried about higher interest rates and Federal Reserve policy, a psychological shift that has been developing for months. While the DJIA and S&P 500 could continue to reach new all-time highs, the more important feature may be the underlying market. Stock picking and a sector and theme focus could outpace indexing this year as investors seek perceived relatively undervalued opportunities.