Q1 2025: PFM Quarterly Commentary
History chronicles the past, but also can act as a blueprint for the future. At least as it pertains to the investment markets, history demonstrates that human nature is a common binding thread through time. Fear, greed, hubris, hope, panic, regret, envy, and apathy remain as prevalent in investors today as in centuries past. These core human impulses recur with some degree of predictability, forming the familiar ebb and flow patterns associated with market cycles. Our understanding of market history along with the application of behavioral finance anchors our market perspective. It’s why we wince whenever someone claims, “…but it’s different this time.” Rest assured; it likely is not.
To substantiate this opinion, we examined several iconic bull markets stretching back to the 1960s. While each episode featured a distinct cast of characters, a closer inspection reveals the plots of cyclicality are almost identical. Take for instance the robust bull market that propelled the S&P 500 from June 1962 to November 1968, driven by a legendary cohort of stocks dubbed the “Nifty Fifty.” This group, while fluid in its exact composition, symbolized the fifty largest companies traded on the New York Stock Exchange and mirrored the ascent of the middle class and the accompanying surge in disposable income. Once-proud household names like Avon, Eastman Kodak, Sears, Polaroid, Digital Equipment Corp, Philip Morris, and Schlitz Brewing, along with enduring giants such as Pfizer, Procter & Gamble, Disney, and Coca-Cola, were mainstays in this exclusive group. For five and a half exciting years, these firms reigned as the darlings of Wall Street. They were the high-flying, must-own engines of wealth creation. Time passed, tastes changed, and most of these names faded into obscurity courtesy of bankruptcy and acquisition. Of the few that survived, most now are mature, slow-growth enterprises, not the vibrant, trailblazing opportunities that once captivated investors.
Between 1974 and 1980, the S&P 500 embarked on another bull market, delivering a total return exceeding 165% from trough to peak.[i] Yet this impressive ascent was overshadowed by the meteoric rise of gold, which surged over 700% during the same period, igniting an investor frenzy reminiscent of the Dutch Tulip Mania in the seventeenth century. Much like its historical predecessor, gold’s luster proved fleeting, and over the subsequent two decades, its value plummeted nearly 80%.[ii] It languished below its 1980 peak until reclaiming that same level in November 2007, nearly thirty years later.
Continuing onward through our journey, as the United States emerged from recession in the summer of 1982, it entered an era of extraordinary economic expansion, accompanied by a stock market of equal vigor. From that point through December 1989, the S&P 500’s price appreciation soared 210% – a robust return by anyone’s measure.[iii] Yet even this remarkable achievement was eclipsed by the “Japanese Miracle,” during which Japan’s flagship equity index, the Nikkei, skyrocketed 458% over the same span.[iv] Japan’s ascent was so formidable that it stoked fears of an economic takeover of the U.S., as Japanese firms snapped up marquee American assets like the Pebble Beach Golf Course, Rockefeller Center, and Columbia Pictures. Inevitably, the Nikkei fell, shedding over 80% of its value across the next twenty years. It would take until March 2024 – thirty-five years later – for the index to finally surpass its 1989 zenith.
We have frequently referenced the U.S. dot-com bubble in these pages, yet its many lessons are worth revisiting. Spanning October 1990 to March 2000, the advent of the internet heralded an era of unprecedented prosperity. Fueled by the perceived boundless potential of this transformative technology, the Nasdaq soared an astonishing 1,350% over the decade, only to surrender nearly 80% of its value in the following two and a half years.[v] It was not until fifteen years later that the index reclaimed its March 2000 peak, subsequently thriving in the years that followed.
The country emerged from the rubble left by the tech bubble popping and began a new bull market from 2002 to 2007, a period remembered for the meteoric increase in home prices and appreciation of value stocks. While both delivered strong returns, it was commodities that truly commanded the stage. Gold, once again gripped by investor fervor, surged 600% during this period, reprising its role as a magnet for mania. Yet, this time, crude oil stole gold’s spotlight. From January 2002 to July 2008, its value rocketed over 700% in an extraordinary ascent.[vi] Can you guess the next chapter in this story? In the years that followed, oil’s fortunes reversed dramatically, plunging so steeply that it briefly traded at a negative value during the depths of the COVID crisis.[vii] This meant that traders were willing to pay money not to take delivery of the commodity. A loss exceeding 100% is a grim reminder of the volatility that generally follows exuberance.
We now arrive at the present. Over the past year, we have devoted considerable scrutiny to the seismic disruptions caused by the “Magnificent Seven” stocks. For context, this elite cohort of tech companies is comprised of Apple, Alphabet (Google), Amazon, Meta (Facebook), Microsoft, Nvidia, and Tesla. In the last decade, the group has grown at such an outsized rate relative to the rest of the market that their massive size warps stock market indexes like the S&P 500, which weights its constituents by market capitalization. By December 2024, these seven titans accounted for an astonishing 33% of the S&P 500’s total composition, exerting an outsized influence on its performance.[viii] We highlight regularly that this concentration poses a serious issue: an index encompassing 500 of America’s largest companies is designed to mirror the broader economic and business landscape, yet that signal is increasingly muffled by the dominance of just seven constituents.
Throughout last year, we routinely discussed this imbalance, noting instances where just five members of the Mag 7 surpassed the combined market value of the 414 smallest companies in the S&P 500. We also observed how robust gains from the Mag 7 propelled the index into positive territory, even as the median return for the remaining 493 companies was negative.[ix] We posited that this divergence was likely unsustainable and acted as a distortion that obscured the true state of the market. To boil it down, the S&P 500 became an unreliable barometer of economic reality.
Astonishingly, the Mag 7, when viewed as an equal-weighted basket of securities, have delivered a 2,186% return since March 31, 2015.[x] This overshadows the S&P 500’s commendable but far more modest 230% over the same period. Let us be clear, we hold in high regard the remarkable value that these seven companies have generated for the U.S. economy and they do occupy a meaningful place in our clients’ portfolios. That said, as we have underscored, such breathtaking outperformance is not without precedent. It’s best to keep in mind that history is replete with analogous tales of exuberance that accompanies every bull market. Similarly, our observations are not meant to presage a collapse akin to those recounted earlier, as the imbalance can be resolved over time as dollars flow out of the Mag 7 and into the scores of assets that did not keep pace over the last several years.
The central lesson from our historical review is that no trend endures indefinitely. No single company, sector, or asset can sustain relentless, breakneck growth without pause. Markets, by their nature, are bound by mean reversion, an inexorable pull back toward equilibrium. As history shows, assets often outpace their fundamentals, trading at lofty valuations before inevitably correcting, only to eventually reach new highs again, even if that journey spans a decade or more. These periodic adjustments, which temper excessive valuations, are part of the market’s natural ebb and flow. They explain why the Nifty Fifty did not balloon beyond the scale of the entire economy, why oil never reached $1,000 a barrel, and why the Nikkei did not overtake the global financial system. Trajectories that once seemed unstoppable had their meteoric ascents eventually checked.
The Magnificent Seven – remarkable innovators that have reshaped modern life – are not immune to the natural forces which impact markets. Despite their extraordinary accomplishments, they cannot outpace the broader market by orders of this magnitude indefinitely. Their ascent, while amazing, remains subject to the same cyclical forces that govern all financial systems.
Just over a year ago, we began documenting the potential vulnerabilities associated with the Mag 7 phenomenon. Our concern arose from subtle cracks we observed in the interplay among the S&P 500’s underlying sectors, which if allowed to evolve, could precipitate a reversal of the Mag 7’s impact on the broader market. In such a scenario, poor performance among these seven companies might mask stronger performance elsewhere. We also posited an unconventional view that long-overlooked, more mundane sectors such as utilities and consumer staples, might be poised to outshine the Mag 7; it was a notion that sounded impossible at the time. Throughout 2024, we chronicled the ongoing struggle between the Mag 7 and the rest of the market, as leadership oscillated between the two. As the year went on, the evidence bolstering our initial hypothesis steadily mounted.
As the first quarter of 2025 drew to a close, investors faced a barrage of alarming headlines concerning the Nasdaq dropping over 10% and the S&P 500 falling over 4.5%.[xi] More importantly, several of the Mag 7 stocks, long regarded as invincible, showed significant signs of strain. High flying names such as Tesla, Broadcom (which joined the Mag 7 last quarter to briefly form the “Elite Eight”), Nvidia, and Alphabet (Google) showed quarterly losses of 36%, 28%, 19%, and 18%, respectively.[xii] A brief glance at the financial media might have been enough to convince folks that the sky was falling.
Yet, as we frequently emphasize, the investment landscape is vast, extending well beyond the S&P 500 and the Mag 7. Many are stunned to learn that the first quarter of 2025 was a solid quarter for many other asset classes outside of technology. Of the eleven sectors within the S&P 500, three of them, Communication Services, Technology, and Consumer Discretionary, house the Mag 7. Unsurprisingly, those sectors fell 6.2%, 12.7%, and 13.8%, respectively, for the quarter.[xiii] By contrast, Energy, Health Care, Consumer Staples, Utilities, Real Estate, Financials, Materials, and Real Estate recorded quarterly gains of 10.2%, 6.5%, 5.2%, 4.9%, 3.6%, 3.5%, and 2.8%, respectively. Industrials stood alone among non-Mag 7 sectors with a slight dip of 0.2%. Viewed holistically, domestic large-cap value stocks, as represented by Peak’s preferred security in this category, achieved a solid 2.4% quarterly return.[xiv] Through this broader lens, the notion of the sky falling seems overstated.
This underreported resilience in the first quarter reached far beyond the non-Mag 7 sectors of the S&P 500. Precious metals surged during the quarter, with Peak’s preferred security climbing 17.9%.[xv] International developed stocks also posted a robust 5.7% gain, while even the more volatile emerging market equities notched a respectable increase of 2.6%.[xvi] Remarkably, bonds spanning various types and geographies also enjoyed a solidly positive quarter, defying their prolonged bear market. Inflation-protected bonds led the charge with a 4.2% gain, followed by longer-dated domestic bonds at 3.6%, broad-based U.S. bonds at 2.8%, investment-grade corporate bonds at 2.6%, and high-yield debt securities at 1.0%. Even international fixed income delivered a 3.7% return for the period.[xvii]
This narrative of economic conditions shaped by the Mag 7 is increasingly divergent from the reality experienced by most other asset classes. This disconnect endured for an extended stretch, but we think its limits are now coming into sharper focus. Only time will tell if this nascent shift away from the Mag 7 will gain momentum, but should it unfold, our portfolios stand well-poised to take advantage of the opportunity.
Regards,
Peak Financial Management
Disclosures:
The views expressed represent the opinions of Peak Financial Management as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
[i] Bloomberg L.P. 2025
[ii] Bloomberg L.P. 2025
[iii] Bloomberg L.P. 2025
[iv] Bloomberg L.P. 2025
[v] Bloomberg L.P. 2025
[vi] Bloomberg L.P. 2025
[vii] Bloomberg L.P. 2025
[viii] Bloomberg L.P. 2025
[ix] Bloomberg L.P. 2025
[x] Bloomberg L.P. 2025
[xi] Bloomberg L.P. 2025
[xii] Bloomberg L.P. 2025
[xiii] Bloomberg L.P. 2025
[xiv] Bloomberg L.P. 2025
[xv] Bloomberg L.P. 2025
[xvi] Bloomberg L.P. 2025
[xvii] Bloomberg L.P. 2025