Ariel Investments says ‘Magnificent 7’ could underperform while neglected names rebound next year

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Watch CNBC's full interview with Ariel Investments co-CEOs Mellody Hobson and John W. Rogers

The investment plays that succeeded in 2023 likely won’t work in 2024, Ariel Investments co-CEOs Mellody Hobson and John Rogers Jr. told CNBC’s “Squawk Box” on Tuesday. 

The two investors think that 2024 could be a breakout year for smaller and value stocks. These names have taken a backseat for most of 2023, as the “Magnificent 7” dominated the market rally. The Magnificent 7 now encapsulate more than three times the market cap of the Russell 2000, Hobson told said.

The S&P 500 is up around 20% in 2023. The tech-heavy Nasdaq Composite, meanwhile, has soared more than 38%.

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SPX in 2023

“I think the S&P will have a harder time versus the smaller indices, because the mean reversion at some point catches up,” Hobson noted. 

“We think it’s an extraordinary time for smaller stocks and value stocks. It is an unprecedented time [that] reminds us so much of the internet bubble,” said Rodgers. “And when that burst, it was a great time for small [and] value as the road started to collapse.”

Rogers also thinks that “hidden gems” lie in the small cap companies outside of the Magnificent 7. 

“It’s not a time to just buy the index and go to sleep,” he said, referring to Warren Buffet’s broad recommendation for investors to own the S&P 500. Rather, stocks that have been “misunderstood, neglected, not well-followed, not well-researched” are currently “extraordinarily cheap” and contain investment opportunities, according to Rogers. 

Hobson and Rogers think a rolling recession has already taken place, and remain optimistic on consumer health and the banking sector heading into 2024. 

“The banking system did recover, I think more strongly than most people expected,” Hobson said, referring to the regional banking crisis earlier in 2023. “I think if anything, we’ve seen a lot of stability there and a lot of strain. And I’m very confident.”

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