Stock market investors could be forgiven for feeling a sense of déjà vu.
Stocks have rallied strongly so far this year, with the S&P500 index of the largest US companies up more than 14% in the first half and then going on to reach a new record level early this month.
It looks a lot like this time last year when the market had advanced 16% in the first six months of 2023 – its best first semester since before the pandemic – and was quickly closing in on a new all-time high.
Just like last year, a select few big-tech leaders have driven almost all the gains so far in 2024.
The ‘Magnificent Seven’ – Microsoft, Apple, Nvidia, Google, Amazon, Meta and Tesla – accounted for almost 60% of the increase in the S&P500 in the first half this year and nearly 80% last year.
While rising concentration in the overall equity market and its performance may cause concern for some, our regular readers will know that we think it’s entirely reasonable and certainly not without precedent.
We’ve often cited the work of Professor Hendrick Bessembinder of Arizona State University, whose seminal research found that just 4% of stocks accounted for all the US$35 trillion of wealth created in the US stock market from 1926 to 2016.
We also recently explained the natural tendency of mega-cap tech companies to capture more of the market’s value. That’s because technology is becoming a bigger part of the economy. These companies are also extending their dominance over peers, and AI promises them a huge boost into the future. We wrote about this in our article and discussed it in this podcast episode.
Of course, returns in equity markets don’t come as evenly as the last couple years might suggest. That’s a topic Andy explores in his article this month ‘Up 30% in a quarter? The mindset needed to successfully invest in transformational stocks‘. In fact, he finds ‘lumpy returns’ are more pronounced for leaders in transforming industries, where markets initially misunderstand the power of change leading to big surprises later on, and enormous rewards for patient shareholders.
But this insight applies more broadly than just the technology sector. Andy points out that KKR, a leading alternative asset manager, saw its stock go sideways for 18 months even as it grew earnings at double-digit rates, but then the share price rocketed 80% in just one quarter.
KKR is in focus again for Amit this month. After detailing our investment thesis on KKR a year ago, Amit follows up with an article ‘Has KKR Become the ‘Berkshire Hathaway’ of Private Equity?‘ that explores the parallels between KKR and Warren Buffett’s Berkshire Hathaway. Beyond aligned reporting measures, both companies made a strategic shift to owning quality ‘compounders’ with wide economic ‘moats’ as well as both having their own captive insurance businesses.
Finally, in the Spotlight Series podcast Andy and Chris dive into the fascinating world of compounders – businesses that consistently achieve sustainable growth and deliver impressive long-term returns.
Letter from the PMs – July 2024
– Andrew Macken & Chris Demasi
Stock market investors could be forgiven for feeling a sense of déjà vu.
Stocks have rallied strongly so far this year, with the S&P500 index of the largest US companies up more than 14% in the first half and then going on to reach a new record level early this month.
It looks a lot like this time last year when the market had advanced 16% in the first six months of 2023 – its best first semester since before the pandemic – and was quickly closing in on a new all-time high.
Just like last year, a select few big-tech leaders have driven almost all the gains so far in 2024.
The ‘Magnificent Seven’ – Microsoft, Apple, Nvidia, Google, Amazon, Meta and Tesla – accounted for almost 60% of the increase in the S&P500 in the first half this year and nearly 80% last year.
While rising concentration in the overall equity market and its performance may cause concern for some, our regular readers will know that we think it’s entirely reasonable and certainly not without precedent.
We’ve often cited the work of Professor Hendrick Bessembinder of Arizona State University, whose seminal research found that just 4% of stocks accounted for all the US$35 trillion of wealth created in the US stock market from 1926 to 2016.
We also recently explained the natural tendency of mega-cap tech companies to capture more of the market’s value. That’s because technology is becoming a bigger part of the economy. These companies are also extending their dominance over peers, and AI promises them a huge boost into the future. We wrote about this in our article and discussed it in this podcast episode.
Of course, returns in equity markets don’t come as evenly as the last couple years might suggest. That’s a topic Andy explores in his article this month ‘Up 30% in a quarter? The mindset needed to successfully invest in transformational stocks‘. In fact, he finds ‘lumpy returns’ are more pronounced for leaders in transforming industries, where markets initially misunderstand the power of change leading to big surprises later on, and enormous rewards for patient shareholders.
But this insight applies more broadly than just the technology sector. Andy points out that KKR, a leading alternative asset manager, saw its stock go sideways for 18 months even as it grew earnings at double-digit rates, but then the share price rocketed 80% in just one quarter.
KKR is in focus again for Amit this month. After detailing our investment thesis on KKR a year ago, Amit follows up with an article ‘Has KKR Become the ‘Berkshire Hathaway’ of Private Equity?‘ that explores the parallels between KKR and Warren Buffett’s Berkshire Hathaway. Beyond aligned reporting measures, both companies made a strategic shift to owning quality ‘compounders’ with wide economic ‘moats’ as well as both having their own captive insurance businesses.
Finally, in the Spotlight Series podcast Andy and Chris dive into the fascinating world of compounders – businesses that consistently achieve sustainable growth and deliver impressive long-term returns.
Sincerely,
Andrew Macken & Chris Demasi
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