Power of the Few
T&V Letter Q4 2024
Whether in politics or capital markets: 2024 was a year in which a few players had a major impact. Argentina's reform course attracted international attention, while the 'Magnificent Seven' once again shaped the US stock market. For investors, it remains crucial to understand concentration not only as an opportunity but also as a risk.
Insight
Argentina shows how radical reforms can create new momentum, but also bring high political and economic risks.
Javier Milei, the President of Argentina, is continuing his radical reform course and has announced plans to fundamentally change the country's tax system. In an interview with Forbes Argentina, Milei explained that he plans to abolish 90% of taxes — not of revenue, but of the number of taxes — and reduce the system to a maximum of six taxes. This measure is part of a comprehensive strategy that includes deregulation, privatization, and labor market reforms. Since taking office in December 2023, Milei has already made drastic cuts, including the dismissal of tens of thousands of public servants, the closure of ministries, and a 31% reduction in government spending.
The country's economy is showing mixed signals. While inflation dropped significantly from 25.5% in December 2023 to 2.4% in November 2024, the unemployment rate rose to 6.9% in the third quarter. However, economic activities recorded growth of 3.9% in the same period, and forecasts indicate that Argentina could achieve a balanced budget in 2024 for the first time in 15 years.
Mileis radical reforms have attracted international attention, particularly from Elon Musk and Vivek Ramaswamy, who are aiming for a similar slimming down of the state in the US with the DOGE initiative. Musk publicly praised Milei's approach as "impressive" and sees his tax and state reforms as a blueprint for the US. Whether this course can also be implemented in the United States will become clear in the coming months.
months ahead.
NEWSLETTER
Dear Reader
While Europe and Switzerland are faltering, the US market dominates once again: the S&P 500 shone with an impressive performance of 23.3%. Already in last year's end-of-year letter we noted: The year 2023 in one word: "The Magnificent Seven".
Precisely these "Magnificent Seven" tech companies also shaped the US markets in 2024 and contributed significantly to the performance. Their dominance is impressive, but carries risks. Together, the seven companies - Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla - now account for about 34% of the S&P 500. Just ten years ago, in 2014, their combined share of the S&P 500 was less than 10%.
Apple alone now has a higher market value than the entire stock market of Germany, Great Britain, or Canada. If Apple were an independent market, it would be the fifth-largest stock market in the world, after the US, China, India, and Japan. In 2025, Apple could become the first company to reach a market capitalization of USD 4 trillion – more than the GDP of all countries except the US, China, Germany, and Japan. Nvidia has also established itself as a heavyweight and was briefly the most valuable company in the world this year.
Although the "Magnificent Seven" have driven market returns, their dominance also carries risks. A significant decline in the "Magnificent Seven" could heavily weigh on the entire S&P 500. With around USD 11 trillion invested in US index funds at the end of 2024 (about 20% of the total US stock market of USD 55 trillion), a sharp sell-off of the Magnificent Seven could trigger a domino effect. In recent years, however, the best investment strategy has been to focus exclusively on the "Magnificent Seven".
Europe struggles with economic weakness
The STOXX Europe 600 (the largest 600 European companies) rose by a meager 6% in 2024. The strong underperformance compared to the US can be explained on the one hand by the lack of tech and AI companies in the STOXX Europe 600. On the other hand, the severely weakening economic situation in Europe, coupled with the dominance of traditional, weaker-performing sectors, acted as an additional burden.
Switzerland is also struggling with a lack of momentum: The Swiss stock market, measured by the Swiss Market Index (SMI), achieved a return of 4.2% in 2024. Six of the twenty SMI stocks even lost ground. Even when dividend income is taken into account, every fourth SMI stock closed in the red in 2024. For a blue-chip index, that is a miserable result. Major tech and AI companies are nowhere to be found here either. In addition, the strong Swiss franc (as usual) and the predominantly defensive sector weighting, which could hardly gain momentum in a growth-oriented environment, weighed on performance. The heavyweight Nestlé dragged down the Swiss stock market again in 2024: With a price loss of 23%, it was the third consecutive year of negative returns. The share price had already fallen by 7.7% in 2023, while a loss of 11.9% was recorded in 2022.
Active vs. Passive: Strategies for Stability
As long as the “magnificent seven” drive almost the entire return, active fund managers have hardly any chance of beating the market. Few active fund managers have these seven companies in their portfolio with a weighting of 34%, as the S&P 500 automatically reflects. Since no one knows how long the dominance of these seven stocks will last, a combination of active and passive strategies seems sensible to us. Even if active approaches could lag behind the overall market in the short to medium term, diversification remains the key to a stable and historically successful long-term investment strategy – a principle that T&V consistently implements.
Outlook 2025
In the long term, stock prices generally move in tandem with corporate earnings growth. However, the extraordinary success of the US market in 2023 and 2024 is also due to the fact that investors were willing to pay higher prices for every dollar of earnings – a sign of their growing optimism. This confidence reflects, among other things, the enthusiasm for artificial intelligence and the business-friendly policies following the Trump re-election.
Whether the positive market sentiment continues will largely depend on whether earnings growth persists and how economic momentum develops. We are keeping a close eye on developments!
As always, we thank you for the trust placed in us!
*This communication is for informational purposes only and does not constitute a personal recommendation or an independent financial analysis.
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