After a broad-based post-election rally, U.S. stock-market breadth has narrowed significantly this month
The “BATMMAAN” stocks swooped to the market’s rescue in December.
After a blistering 2024 rally, the U.S. stock market has run into a bit of trouble in December.
And investors have responded by reverting to familiar behaviors — namely, bidding up shares of megacap technology giants. Long known as the Magnificent Seven, the recent ascendance of shares of Broadcom Inc. past the $1 trillion market capitalization mark has inspired a new term: the “BATMMAAN” stocks.
The group includes Broadcom, plus the seven original Magnificent Seven names: Nvidia Corp., Tesla Inc., Amazon.com Inc., Microsoft Corp., Meta Platforms Inc., Apple Inc. and Alphabet Inc.
While the rest of the U.S. market has struggled over the past month, shares of those eight companies have kept marching higher, building on the gains that followed President-elect Donald Trump’s electoral victory on Nov. 5.
Despite hitting some turbulence toward the end of last week, the group has seen its combined market capitalization increase by more than $1.9 trillion since the election, according to Dow Jones Market Data. That is equivalent to more than 85% of the total increase in the S&P 500’s market capitalization during that time.
Initially, Trump’s victory had helped spur a broad-based postelection rally, with value stocks like financials and small-cap stocks rising alongside megacaps like Tesla. But since the start of December, financials and other stocks that had climbed in the aftermath of Trump’s win have seen their gains fizzle.
Heading into the final two trading days of the year, sector performance in December was looking a lot like it did in 2023. Only three of the S&P 500’s 11 sectors were in the green for the month as of Friday: information technology, consumer discretionary and communication services. Each of the eight “BATMMAAN” stocks belongs to one of those three sectors.
While the S&P 500 index appears headed for a monthly loss, the Nasdaq Composite, which is much more heavily exposed to the Big Tech megacaps, is up about 2.5% as of Friday’s close, according to FactSet data. The Dow Jones Industrial Average has also struggled this month, tallying its longest losing streak since the mid-1970s.
The S&P 500 endured its longest stretch of negative breadth — when the number of members falling on a given day surpassed the number climbing — since at least the end of 1999.
“Postelection we had a nice broadening out of the market,” said George Cipolloni, a portfolio manager at Penn Mutual Asset Management, during an interview with MarketWatch on Friday.
“These stocks did well for a few weeks there, then it reverted right back to a hyper-concentrated market.”
As a result, the U.S. market is on track to finish the year at what is by some measures its most concentrated level in recent history. According to Apollo’s Torsten Slok, the combined weight of stocks in the S&P 500 with a weighting of at least 3% of the total index recently reached its highest level since at least the early 1990s.
That group includes five names: Apple (7.2%), Nvidia (6.3%), Microsoft (6%), Alphabet (4.4%) and Amazon (4.4%).
Many bulls argue that these megacap stocks deserve their elevated valuations. That is an easy argument to make for Nvidia and Broadcom, which have both reported torrid earnings and sales growth over the past two years.
But other members of the group, such as Apple and Tesla, aren’t growing nearly as quickly, Cipolloni said.
Stretched valuations mean these stocks could be vulnerable in the new year if their results disappoint, or if investors start to sour on the potential for artificial-intelligence technology to deliver a substantial boost to workers’ productivity over the near term.
Slok warned that investors should be aware that the S&P 500 no longer presents the same opportunities for diversification that it once did, now that a handful of stocks exert such outsize influence.
“When you put all of your eggs in one basket, you’ve got to watch that basket,” Cipolloni said.
Show me the money
To be sure, the stock market’s gains in 2024 have been much more broadly distributed than they were in 2023. As of Friday, 10 of the S&P 500’s 11 sectors were on track to finish higher, according to FactSet data.
Small- and midcap stocks that had struggled during the early phases of the bull market have also seen stronger gains, although they have continued to trail their large-cap peers.
This broader advance has helped push the S&P 500 to the brink of a rare accomplishment: For the first time since 1998, the large-cap index is on track to tally a total return north of 25% for the second year in a row. Total return includes dividends, along with any price appreciation for the index’s member stocks.
Wall Street expects the rally to continue in 2025, albeit likely at a slower pace.
But key questions remain. Earnings outside of the megacap space have been largely stagnant for the past two years. But Wall Street analysts finally expect significant growth for the other 493 companies in the S&P 500 in 2025.
However, investors could see their enthusiasm about earnings growth dampened by rising Treasury yields, which helped contribute to the market’s December weakness, Cipolloni said. At the very least, higher borrowing costs could distract investors from putting more money to work outside of the megacaps, which are seen as the most resilient to higher interest rates.
The yield on the 10-year Treasury note has risen roughly 100 basis points since the Federal Reserve cut its policy interest-rate target by 50 basis points in September. That has left yields hovering around their highest levels since early May, according to FactSet data.
Alternatively, investors could start to question whether the advent of AI really justifies the lofty valuations enjoyed by some of these companies.
Thus far, investors have been willing to bid up the BATMMAAN stocks based on their massive investment in AI infrastructure. So far, the AI trend has delivered explosive earnings growth for Nvidia. But aside from chip designers, many of the advances in AI have yet to translate to profits.
Next year, investors could start to demand more concrete evidence that these investments will pay off, said Burns McKinney, a portfolio manager at NFJ Investment Group.
“We’ve been letting some of these AI darlings ride on credit for some time,” he said. “That’s kind of what I mean when I say they need to ‘show me,’” he said during an interview with MarketWatch.
If they don’t, investors could instead gravitate toward value stocks and other corners of the market with more attractive valuations.
“Everybody loves a comeback story,” he told MarketWatch over the phone.
Even if the AI trade hits a rough patch, few expect that would ultimately translate into broad-based losses for the market.
McKinney pointed out that the combination of an accommodative Fed and Trump’s planned tax cuts and deregulation should help keep the rally going in 2025.
“The fundamentals show that stocks are expensive, but the policy backdrop is very supportive,” he said.
There is not much on the U.S. economic calendar over the next week, as investors prepare for the New Year’s Day holiday. Fresh readings on weekly initial jobless claims and the ISM manufacturing sector activity index could be the highlights.
U.S. stocks finished lower on Friday, but the S&P 500, Nasdaq Composite and Dow Jones Industrial Average still managed to tally gains for the week, according to FactSet data.
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