Barbara Reinhard, CFA
Senior Managing Director, Chief Investment Officer, Multi-Asset Strategies and Solutions
A slew of economic data released last week has investors considering the potential effects of slower growth and persistent inflation on both markets and monetary policy going forward. Real GDP for the first quarter came in well below expectations at 1.6% (versus an expected 2.5%), while the US PCE price index increased 3.7%, above the forecast 3.4%.1
The market reacted quickly, repricing risk assets down over 1%, most of which was clawed back by positive reactions to Big Tech earnings. In contrast to the downbeat economic data, earnings releases from Alphabet and Microsoft comfortably exceeded expectations, helping the overall market have a positive end to the week. It was also notable to see Alphabet declare a first-ever dividend.
Big Tech companies have been on a stellar run since their October 2022 lows, with the Magnificent 7’s return more than double that of the major indices (roughly 15% vs 7% for the S&P 500 index).2 Investors seem to view these mega-cap names as a haven in a slowing growth world, given their ability to deliver consistent earnings growth and their position as beneficiaries of the ongoing AI boom. However, with the top 10 stocks in the S&P 500 holding a combined weight of roughly 30%, concentration risk is front of mind for investors.
Although the recent economic data may paint a worrisome picture in some minds, it is important to step back and recognize that the trend in inflation still points downwards. For investors who see the disinflation narrative persisting, it might be worth looking beyond the citadel of Big Tech to the broader market—especially mid-cap and international equities, which are extremely cheap on a relative basis.
Arjun Kaushik contributed to this article.