Though they may seem like conflicting statements, we believe that 2023 will be remembered both as a year of financial speculation and a return to normalcy. And no, we don’t believe that speculation is normal—or healthy.

Last year began with widespread predictions that high inflation and interest rates would shock the economy into a recession. The most startling outcome of this outlook, in our estimation, is that investors concentrated their assets in just a handful of large technology companies, with a preference for those with some connection to the emerging field of artificial intelligence. Dubbed the Magnificent 7, these stocks accounted for essentially all of the stock market’s returns through the first ten months of the year. While all excellent companies, they also share the same characteristics of being expensive, over-owned and somewhat risky. The S&P 500 is now more concentrated than it has ever been. Over the last 35 years, for example, the average weight of the top 10 stocks in the S&P 500 has been 20%. Today, it stands at 32%.

The Long Run – February 2024