Investment Team Voices Home Page
Are the Times A-Changin’?
April 1, 2025
Jim Madden, CFA, Tony Tursich, CFA, and Beth Williamson
Summary Points:
- Market leadership shifted in the first quarter, with technology trailing the broader market and international markets leading the US.
- The equity market is underpinned by vulnerabilities, including uneven capex growth between the Mag 7 and the majority of companies, and spending disparities between the highest income earners and the rest of consumers.
- Narrow, momentum-driven rallies have often ended quickly and dramatically, typically followed by periods of broadening.
- Against this backdrop, risk management should not be ignored, and we believe diversification will re-emerge as an essential risk-mitigation strategy.
A volatile first quarter saw reversals of major trends. First, technology lagged the broader market after pushing the S&P 500 Index to gains of more than 20% in each of the past two years. This downturn was led by the set of mega-cap companies known as the Magnificent 7, with Tesla, Apple, and Nvidia all experiencing significant drops. Second, international markets outperformed the US, which has not been the case for most of the past 15 years.
Time will tell if these reversals continue, but anxiety around the Trump tariffs, growing recession fears, and continuing inflation concerns give the market plenty of ways to worry.
US markets have had quite a run since the Great Financial Crisis, with the S&P 500 Index returning more than 16% annualized. That runup has benefited asset owners and has been driven largely by technology stocks. But the long rally has resulted in some vulnerable underpinnings to the current market.
The Magnificent 7’s investment in AI has been truly massive. The next step is finding a way to earn a return on that large investment. Succeeding in that step will help buoy markets further. But hiccups in that process could spell trouble. The chart below shows that capital expenditures for non-Magnificent 7 companies are not strong enough to make up for a slowdown in tech spending by the Magnificent 7.
Capex Growth: Mag 7 Versus the Rest of the S&P 500 Index
Source: Bloomberg. John Authers, “Trump, Xi Play to Win at Sun Tzu’s Art of Trade War,” February 4, 2025.
The other part of the economic foundation that bears watching is the dependence on a small group of consumers to drive economic growth. The top 10% of US earners now account for 50% of all spending, the highest on record. A drop in asset prices or some other shock that shakes the confidence of the top decile would have an outsized economic effect.
Share of Spending by Income Group
Source: www.wsj.com, “The U.S. Economy Depends More Than Ever on Rich People,” Rachel Louise Ensign, February 23, 2025, using Moody’s Analytics.
As with all bull markets, the margin for error gets smaller as time goes on. The narrow, momentum-driven rally of the past three years is the type that often ends quickly and violently, followed by years of broadening. The turning point may or may not be here; no one can know for sure. But drawing on more than 30 years of experience, our team is confident that diversification—today viewed by many investors as a headwind for performance—will ultimately return to its role as a risk reducer.
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