Tech giants dominate the US stock market once again, but UBS is not worried: there is still room for growth!
UBS's strategy team pointed out in its 2024 outlook that large technology stocks will continue to dominate the U.S. stock market, with expected returns for the top six weighted stocks reaching 48%. Despite market concerns about the concentration of the rally, UBS believes that the earnings growth expectations for these tech stocks are rising, and although valuation growth is slowing, there is still room for appreciation. The report shows that over the past decade, the rally in the S&P 500 has become increasingly concentrated, with the six largest stocks accounting for 31.2% of the total market capitalization. Even excluding tech stocks, the U.S. stock market still appears expensive
Looking back at the U.S. stock market in 2024, large technology stocks once again "dominate the competition." Does this mean that the concentration of gains will continue to pose a significant threat to the U.S. stock market?
The UBS strategy team stated in a research report released on January 2 that in 2024, leading technology stocks will still lead the market's rise. The top six weighted stocks are expected to achieve a return of 48% in 2024, contributing 9% to the S&P 500 index's increase over the past year. If these six stocks are excluded, the remaining S&P component stocks have only increased by 16% year-to-date.
Although some investors are still concerned about the risks of market gains being too concentrated, UBS believes that considering the significant upward revision of earnings growth expectations for leading technology stocks next year, and their valuation growth slowing significantly compared to the market, there is still potential upside.
Strong earnings momentum and relatively low valuations suggest leading technology stocks may continue to rise
The report shows that over the past decade, the gains of the S&P have become increasingly concentrated, with the six largest stocks now accounting for 31.2% of the total market capitalization, a significant increase from 11.2% in 2013.
The market is clearly concerned about the trend of gains being concentrated in leading technology stocks. Data from the report indicates that the average reduction in large-cap stock portfolios for the six major indices exceeds 6%, with only the reduction for Google's parent company Alphabet being below this level.
However, the report also adds that over the past year, large technology stocks contributed 38.9% to the gains in the U.S. stock market, far exceeding other individual stocks (5%), while their valuation increase (5.8%) was actually lower than that of other stocks (8.6%). This means that while large technology stocks continue to expand their earnings, their valuation growth is slowing, making them "cheaper" compared to the overall market.
Even excluding technology stocks, the U.S. stock market remains quite expensive. The report shows that, looking vertically, the current S&P price-to-earnings ratio is 21.5 times, about 1.5 standard deviations above the historical average; looking horizontally, the valuation premium of the S&P compared to the non-U.S. developed market index (EAFE) continues to widen.
At the same time, regarding the expected factors most affecting returns, the report states that the market generally expects the earnings per share growth rate of the six major technology stocks (19.1%) to continue to outperform the market (10.8%) next year, and it remains far above the average level of the past 30 years (5%)
Since 2024, the earnings expectations for the six major technology stocks have been continuously revised upward, while others have steadily declined. UBS expects this trend to continue into 2025.
Overall, the report suggests that strong economic growth, earnings exceeding expectations, narrowing credit spreads, and valuation increases all support the market's rise in 2024.
Although some investors are concerned about the market overheating, the report believes that these concerns may be exaggerated. Even compared to the tech bubble period, based on current economic and market data, U.S. stocks still have room for upward movement, and 2025 is expected to be "another strong year."
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