Big Boost From Big Tech

Among the strongest performers in 2023 were technology stocks, recovering after a poor showing in 2022. The tech-heavy Nasdaq rose 44.6%.¹ Much of the stock market’s gains can be attributed to just a handful of companies, recently dubbed the Magnificent 7.² They were led by NVIDIA amid strong sales of its computer chips, as interest in artificial intelligence built. However, valuations for those seven stocks remain high, with an aggregate price-to-book (P/B) ratio of 12.71. This helped push up the Nasdaq’s P/B ratio to 5.83. Some other prominent indices have substantially lower valuations. For example, the MSCI All Country World IMI Index’s P/B ratio is less than half that of the Nasdaq’s (see Exhibit 1). While high valuations may concern equity investors, they can result from a subset of companies. Investors should be careful not to paint all stocks with the same brush.

Exhibit 1: Magnificently Priced (Aggregate price-to-book ratios as of December 31st, 2023)

Magnificent 7 outperformance might be difficult to sustain; past gains don’t guarantee future ones. Rather than seeking additional exposure to these mega cap stocks, investors may be better off ensuring their portfolios are broadly diversified, positioned to capture the returns of whatever companies may rise to the top in the future.

The gains of the growth-oriented US tech sector helped growth stocks outperform value stocks on a global basis and in the US, despite a strong start and finish to the year for value. The MSCI All Country World Growth Index rose 33.2% vs. a 11.8% increase for the MSCI All Country World Value Index. Without the help from US tech stocks, the MSCI All Country World ex USA Growth Index rose 14.0% vs. a 17.3% increase for the MSCI All Country World ex USA Value Index, resulting in a positive value premium outside the US. Small cap companies lagged behind large cap stocks globally: The MSCI All Country World Small Cap Index returned 16.8% vs. 22.2% for the larger-cap MSCI All Country World Index. Historically, small caps and value stocks have outperformed large caps and growth stocks, respectively.³

In the bond market, US Treasuries rebounded after posting their worst annual return in decades in 2022, with the Bloomberg US Treasury Bond Index gaining 4.1% vs. the previous year’s 12.5% decline.⁴ But it was not a smooth ride for investors. Despite rising bond prices generally, yields (which fall when prices rise) were higher than they have been for most of the past decade. The 10-year Treasury yield nearly touched 5% in October for the first time since 2007, before pulling back below 4% by year-end.⁵ For the entire year, the 10-year yield was lower than that of three-month bills, keeping the yield curve inverted. While many investors see yield curve inversion as a foreboding signal of a recession or stock market downturn, data from the US and other major economies show yield curve inversions have not historically predicted stock downturns consistently.⁶ And no US recession was declared in 2023.

Foot Notes:

1. Based on the 2023 calendar-year return of the Nasdaq Composite Index. © 2024 Nasdaq Inc. All rights reserved. Returns are calculated from the total return index values.
2. The Magnificent 7 stocks include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. Named securities may be held in accounts managed by Dimensional.
3. The MSCI All Country World Small Cap Index has outperformed the MSCI All Country World Index by 2.4 percentage points, annualized, since 1999, the first year for which data is available.
4. Based on the 2023 calendar-year return of the Bloomberg US Treasury Bond Index. Bloomberg data provided by Bloomberg Finance LP.
5. Source: US Treasury.
6. Eugene F. Fama and Kenneth R. French, “Inverted Yield Curves and Expected Stock Returns” (white paper, 2019).
7. ⁽⁹⁾Average P/B ratio for the Fama/French Total US Market Research Index from October 1993 through September 2023, the most recent data available.

Past performance is not a guarantee of future results.

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