If there were any doubt for when the Federal Open Market Committee (FOMC) would be done with their interest rate hiking cycle, those doubts were blown away last Wednesday when the Fed not only maintained its pivotal policy rate unchanged, but also projected a reduction of 75 basis points in 2024.
Fed Chairman Jerome Powell, in the post-decision press briefing, mentioned that discussions about reducing rates were “clearly a topic of conversation” among policymakers. In other words, after eleven rate hikes over the past two years, which pushed the fed funds rate to its highest level in 22 years, the Fed just proclaimed that its efforts to fight inflation have worked. And now the central bank has given the market some confirmation that it is done with its rate hikes and is poised to initiate reductions soon.
As you can expect, stocks skyrocketed last week as investors celebrated the Fed’s gift. For the week, the S&P 500 gained 2.6% and is now less than 1.6% away from a record close set in January 2022. The Dow Jones Industrial Average added 2.7% during the week, after jumping more than 400 points on Thursday to surpass 37,000 for the first time. The Nasdaq gained 2.9% and is roughly 9% from its all-time intraday high. There is now some assurance that a year-end Santa Claus rally is now more than just a wish.
Investors don’t need to look too far to find the source of the recent rally. With the Fed announcing its pivot from its hawkish stance to a dovish policy, growth stocks, particularly the “Magnificent Seven” mega-cap stocks, will now be in vogue. These mega-cap tech giants consisting of Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) will be money-makers for investors who own then today.
Some investors who have missed the massive three-month rally are wondering whether there is still room for gains in 2024. Year to date, Apple — the largest of the bunch in terms of market cap — has retuned by 58%, while Microsoft the second largest, boasts a gain of 55%. But the impressiveness doesn’t stop there when considering that Tesla (up 134%) has doubled in value, while Meta has enjoyed a remarkable return of 170%.
There are a range of opinions as to whether there is still value to be gained in these mega-cap stocks, which have already been stellar performers. But while their collective valuation might have gotten a bit stretched, their tech leadership in the financial markets remain undeniable. The reason for their collective popularity, which can’t be overstated, stems from their exposure to high-growth technologies, such as high-end software and hardware, cloud computing and artificial intelligence.
While there are some reasons for caution as their collective valuation have soared, investors should position their portfolios to be on the right side of the pivot in 2024, especially amid clearer signs of dampening inflation risk. In that vein, the Fed has done a solid job managing inflation which has dropped to 3.7% year-over-year in November, after hitting the highest levels in decades at over 9% in mid-2022. While the inflation is not yet at the Fed’s 2% target, the Fed has just told us they are done raising rates.
The Magnificent Seven stocks, aptly coined by Bank of America analyst Michael Hartnett, have more than doubled the return of the S&P 500 over the past decade. Armed with tons of cash on the balance sheet, strong cash flows and excellent leadership, they are well-positioned to continue leading their respective markets in 2024 and making new all-time highs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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