5 Reasons the S&P 500 Will Outperform the Nasdaq Composite and the Dow Jones Industrial Average in 2024

Despite holding a smaller stake in rising growth stocks such as Nvidia (NASDAQ: NVDA)THE S&P 500 increased as market growth expanded beyond growth stocks to include traditionally safe and heavy sectors.

Here are five reasons why the S&P 500 is outperforming Nasdaq Composite and Dow Jones Industrial Average in 2024 and what it means for your portfolio.

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1. The weakness of the magnificent seven

The “Magnificent Seven” is a term used to describe seven technology-oriented companies that have posted massive gains in 2023. Although most of the group has had a strong start this year, most Magnificent Seven stocks are now underperforming the S&P . 500 years to the present.

NVDA data by YCharts

The Nasdaq Composite has a larger weighting in each Magnificent Seven component than the S&P 500, so it benefited more from the performance of standouts like Nvidia and Meta platforms. However, plenty of growth stocks have started to cool off as investors look more closely at valuations and question whether earnings growth can support higher multiples.

2. Appraisal concerns

In general, the Nasdaq Composite tends to have a higher price-to-earnings (P/E) ratio than the S&P 500 and Dow because many components are valued more based on where their earnings will be years from now than where they are i am today For example, Microsoft (NASDAQ: MSFT) has much more opportunity for earnings growth than a bold such as Coca colaso Microsoft deserves a more expensive valuation.

But at some point, investors may wonder if earnings growth can live up to expectations, or if the gap between value stocks and growth stocks is too wide. Even now, the Invesco QQQ Trustwhich reflects the performance of the 100 largest non-financial companies listed on the Nasdaq Stock Exchange (known as the Nasdaq 100), has a P/E ratio of 37.8 compared to 27.8 for SPDR S&P 500 ETF and 24.3 for SPDR Dow Jones Industrial Average ETF.

So if the earnings growth rate of Nasdaq stocks slows due to a downturn in the business cycle or any number of unforeseen factors, the Nasdaq could continue to underperform the S&P 500 because it is valued more on future earnings than on historical gains.

3. Other sectors are playing catch-up

2024 was the catch-up year for many affected sectors. As of mid-August, Vanguard’s best 2024 ETF was Vanguard Utility ETF. Other heavy sectors such as consumer staples, financials and healthcare also fared well. The market rally has extended beyond growth stocks — which can happen when certain sectors look too cheap compared to the rest of the market.

It is also important to remember that the market hates uncertainty. With the stock market hovering around all-time highs, recession fears and the upcoming election, investors may gravitate toward safer pockets of the market in the near term. September 3 was a perfect example of this behavior, as the Nasdaq Composite sold off more than 3% and the S&P 500 fell more than 2% — and yet — the consumer staples sector rose 0.7%, and utilities and healthcare were essentially. flat.

4. Strong performance of megacap value stocks

Growth stocks dominate the weightings of the broader indexes, with the technology sector accounting for 31% of the S&P 500. The influence is even greater given companies such as Amazon, adzeMeta Platforms and Alphabet I’m not technically in the tech sector.

But lately, there have been strong performances from some sizable companies that are clearly not part of the tech sector. Take for example Berkshire Hathaway, JPMorgan Chase, Walmartand Coca-Cola — four industry-leading companies with a combined market capitalization of more than $2.5 trillion that have been crushing broader indexes so far this year.

It’s not that these companies’ results were particularly strong, but rather that they were good relative to investors’ expectations and valuations. Walmart is the best-performing stock in the Dow Jones Industrial Average in 2024 because it has been undervalued for the year and because it is growing modestly while many of its peers struggle.

5. Gravitation towards “safe stocks”

Another advantage of many heavy companies is that they can do well during periods of economic slowdown or even recessions.

In a slowdown, consumers may cut spending on discretionary goods, businesses may cut spending on Nvidia chips, and industrial companies may pull back on investments in new equipment. But demand for electricity, gas and water supplied by utilities, health services, Coca-Cola products or detergent brands owned by Procter & Gamble it will probably be fine.

Many megacap stocks also pay dividends, which can be a way to generate income without having to sell stocks on the cheap.

Filter out the noise

Understanding what drives broader indices can help you understand stock market movements. It can also explain why your portfolio’s performance can vary widely from an index like the S&P 500.

When starting a new position in a company, adding to an existing holding, or simply holding a stock during periods of volatility, it’s helpful to know how much of that company’s valuation is based on fundamentals and how much is driven by the animal spirits. Or as Morgan Housel talks about in his book, The Psychology of Moneythe stock market is a playing field where many games are played simultaneously.

Traders can boost the stock price or beat other declining stocks based on flashy reactions, while others play the long game and look to invest in quality companies that can amplify over time. The power of compounding is why long-term investing is a winning strategy. When looking at how to position your portfolio, make sure you stick to your principles while being aware of the noise so you don’t get caught off guard by volatility.