The market of 2023 will be remembered for one of two things: the artificial-intelligence (“AI”) boom or the domination of the “Magnificent Seven” tech stocks.

The truth is, both themes are part of the same investment story…

When AI took center stage early last year, the Magnificent Seven were the most obvious winners of that trend.

This iconic group – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla – racked up an average gain of 111% last year… more than four times the overall market’s return.

These stocks pushed markets higher. And that led to a rare setup… A vast majority of stocks underperformed the overall index.

That’s unlikely to persist this year, though. Instead, it’s smart to bet on stocks returning to normal.

Let me explain…

The Magnificent Seven had an incredible year in 2023. They drove the major indexes higher on promises of innovation. And in the end, they were responsible for most of the market’s return.

That’s what makes last year’s bull market so strange: While the overall market had a great year, the majority of stocks actually underperformed…

Roughly 28% of stocks in the S&P 500 Index lost money last year. About 55% of stocks saw gains of less than 10%. And incredibly, about 70% of stocks underperformed the overall market.

That’s an unprecedented figure. It’s the highest percentage we’ve seen since the turn of the century. Take a look…

There’s a lot to unpack in this chart. But three main points jump out at me…

First, the extreme nature of 2023 is something we’ve never seen before. The only year that comes close to this level of underperformance was 2020, at just over 60%.

So if 2023 felt unique to you, that’s because it was.

Second, this underperformance isn’t necessarily good or bad for stocks…

Despite the pandemic crash, 2020 turned out to be a good year for markets – and so did the year after. A high underperformance reading didn’t lead to poor results. But the third-highest underperformance reading was in 2007. That was a rough year for stocks in its own right… And it preceded the worst year of the century.

One final point, though, is the most important to understand… History shows that times like 2023 – when a small group of stocks is crushing the market – don’t tend to last.

As you can see on the chart, the following years tend to mark a “return to normal.” Underperformance was lower in 2008 than 2007… and lower again in 2009. And we saw similar steps down from 2020 over the next two years.

This means the dominance of the Magnificent Seven may have been the defining investment story of 2023… But it won’t be the story that dominates 2024.

Instead, I expect we’ll “overcorrect.” We’re likely to see a large chunk of less popular stocks bounce back and outperform the broad market.

Now, that doesn’t mean the S&P 500 won’t do well this year. It should do just fine, as we’ve covered here in DailyWealth over recent weeks. But instead of another exceptional 25%-plus return, we might see the index return between 10% and 15% as the largest stocks cool down.

This will also create plenty of opportunity in the underbelly of the market…

The smaller, lesser-known stocks could absolutely soar in 2024. So, according to history, those are the investments you should be focusing on right now.

Good investing,

Brett Eversole

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth