To The Moon

In 2024, the $S&P 500(.SPX)$ has surged over 15%, outpacing the $DJIA(.DJI)$ ’s 8% gain and the $NASDAQ(.IXIC)$ ’s 14.35%. This shift indicates that the U.S. stock market dynamics have changed, with the rally no longer driven solely by growth and big tech stocks. Instead, it has broadened to include traditionally safer and more conservative sectors, showing a more widespread uptrend.

Here are five reasons why the S&P 500 has outperformed the Dow and Nasdaq this year:

1.The "Mag 7" Loses Its Shine

The "Mag 7" refers to seven tech giants that soared in 2023. This year, most of these stocks have lagged, with their performance falling short of the S&P 500. Since these stocks have a heavier weight in the Nasdaq, the impact of $NVIDIA Corp(NVDA)$ $Meta Platforms, Inc.(META)$ and others is more pronounced.

However, valuation concerns have cast doubt on whether their earnings growth can justify their high valuations, leading to a cooling of many growth stocks.

2.Valuation Concerns

Typically, the Nasdaq’s P/E ratio is higher than that of the S&P 500 and Dow, given that many Dow components are valued more on current earnings rather than future potential. For instance, $Microsoft(MSFT)$ ’s growth prospects justify a higher valuation compared to Coca-Cola.

But when investors doubt that earnings growth will meet expectations or when valuation gaps between growth and value stocks become too wide, these growth stocks can face a “Valuation crash.” For example, $Invesco QQQ(QQQ)$, which tracks the Nasdaq 100, has a P/E ratio of 37.8, compared to 27.8 for the $SPDR S&P 500 ETF Trust(SPY)$ and 24.3 for the $SPDR Dow Jones Industrial Average ETF Trust(DIA)$ .

3.Other Sectors Playing Catch-Up

2024 has been a year of catch-up for many lagging sectors. By mid-August, the best-performing Vanguard ETF was the $Vanguard Utilities ETF(VPU)$ . Sectors like consumer, financial, and healthcare have also performed well. These stocks were previously undervalued, so when the market rotates, they experience gains.

Additionally, in a market dealing with historical highs, recession fears, and an upcoming U.S. election, investors are gravitating towards safer bets. On September 3rd, for instance, while the Nasdaq fell over 3% and the S&P 500 dropped more than 2%, consumer rose 0.7%, with utilities and healthcare remaining steady.

4.Strong Performance from Large-Value Stocks

Growth stocks have a significant weight in major indices, with tech comprising 31% of the S&P 500. However, some large, non-tech companies have recently stood out. For example, $Berkshire Hathaway(BRK.B)$ $Berkshire Hathaway(BRK.A)$ $JPMorgan Chase(JPM)$ $Wal-Mart(WMT)$ $Coca-Cola(KO)$—collectively worth over $2.5 trillion—have outperformed major indices this year.

Their gains come not from stellar performance but from low expectations and undervaluation. Walmart, the top-performing Dow component of 2024, has risen despite being undervalued.

5.Shift in Funds to "Safe Stocks"

Non-tech giants also have the advantage of performing well during economic slowdowns or recessions. As the economy slows, consumers cut back on discretionary spending, companies reduce spending on $NVIDIA Corp(NVDA)$ chips, and industrial firms scale back on new equipment investments.

However, demand for essentials like utilities, healthcare, and products from companies like $Coca-Cola(KO)$ or $Procter & Gamble(PG)$ remains steady. Moreover, many large-value stocks pay dividends, providing investors with income without needing to sell their shares at low prices.