(Bloomberg) – The rally in tech megacaps continued to gain momentum, with the Nasdaq 100 posting its best first half ever and Apple Inc. hitting the $3 trillion mark.
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Traders saw the glass half full after data signaled that inflation was weakening at the expense of economic growth. Stocks continued to climb this year, with technology cementing its lead amid the rise of artificial intelligence. Big banks posted their first monthly gain since January after passing the Federal Reserve’s stress test. After the market closed, JPMorgan Chase & Co., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. announced higher dividends.
Year-to-date, companies in the Nasdaq 100 are up nearly $5 trillion in value, with the tech-heavy index defying bubble warnings to climb nearly 40%. The rise of the most influential group in the S&P 500 helped the index rise 16% in 2023. The gains were even more noticeable when looking at the megacap space, which was up 74%.
“I still like big tech,” Larry Adam, chief investment officer at Raymond James, told Bloomberg Television. “I believe that technology is always reinventing itself – with the latest development being AI, of course. That will further increase the result.”
The “Big Seven” – including Apple, Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Nvidia Corp. and Tesla Inc. — grew their earnings at 14% a year over the decade through 2022. Though their overall earnings have tumbled more than 20% over the past year, they’re expected to recover quickly.
The story goes on
The Nasdaq 100 rose over 1.5% on Friday, while the S&P 500 touched its highest level since April 2022. The U.S. stock benchmark posted its best first half since 2019. Nvidia, which has nearly tripled this year, gained about 3.5%.
If history is any guide, the strength of the Nasdaq 100 this year bodes well for the rest of 2023.
Years that start with index increases of at least 10% yield an average return of about 14% in the second half of the year. However, that will shrink to an 8.3% gain if the first-half gain tops 20%, according to an analysis by data compiled by Bloomberg.
The market’s fascination with the power of generative AI has trumped all the major themes potentially clouding sentiment this year: recession fears, elevated inflation rates, prospects for further Fed rate hikes, geopolitical risks, the debt ceiling debate and the collapse of a few regional banks.
While the AI rally can be compared to the dot-com bubble of 2000, when the market was driven by a similarly narrow range of technology stocks before the crash, BlackRock’s Tony DeSpirito said earnings growth was on the way.
“The demand is really real,” said DeSpirito, the company’s chief investment officer for U.S. fundamentals. “This is in contrast to what’s going on in AI, with the metaverse a year ago, or virtual reality. The orders are there.”
Still, there are growing concerns about valuations after such a sharp rise, and that has led to a surge in bearish bets against the biggest tech companies of late. According to data compiled by S3 Partners, short interest as a percentage of shares available for trading is near 12-month highs for Microsoft, Tesla and Amazon.
“Be picky”
“We do not believe the AI trend is a bubble, but advise investors to be selective in AI-related stocks following the strong year-to-date rally,” said Sundeep Gantori, equity strategist at UBS Global Wealth Management. “From a positioning perspective, we recently closed our self-help theme as we see better risk/reward in mid-cycle (software, internet) and technology laggard industries.”
Barring any evidence of a technical deterioration, it is likely that markets will continue to rally through mid to late July before a possible minor correction in August, according to Fundstrat Global Advisors’ Mark Newton.
“Unless signs of a stronger overbought situation are combined with more bullish sentiment and some signs of defensive strength and/or weakening technical breadth, it is arguably wrong to consider a halt to this rally on overbought conditions alone when the technical trends remain very intact,” Newton noted.
Also helping the tech industry on Friday was subdued bond market activity. The yield on 10-year government bonds fell to around 3.8%. The dollar fell, extending this year’s losses.
Key US inflation indicators cooled in May and consumer spending stagnated, suggesting that the economy’s main engine is starting to lose some momentum. The consumer spending index, one of the Fed’s favorite indicators of inflation, rose 0.1%. Compared to the previous year, the value was reduced to 3.8%, the smallest annual increase in more than two years.
“The May PCE report released today is relatively benign from the Fed’s perspective and suggests that the Fed will ultimately make just one more rate hike rather than two more,” said Krishna Guha, vice chairman of Evercore ISI. “This should put a damper on the recent rise in yields and favor big tech.”
Elsewhere, Brent oil posted its longest streak of quarterly losses in more than three decades as supply held steady and continued demand concerns emerged.
The global benchmark settled below $75 a barrel on Friday, marking its fourth straight quarterly loss, while West Texas Intermediate posted its first consecutive quarterly decline since 2019.
Some of the key movements in the markets:
Shares
The S&P 500 was up 1.2% as of 4 p.m. New York time
The Nasdaq 100 rose 1.6%
The Dow Jones Industrial Average rose 0.8%
MSCI World Index up 1.1%
currencies
The Bloomberg Dollar Spot Index fell 0.3%
The euro rose 0.4% to $1.0913
The British pound rose 0.7% to $1.2699
The Japanese yen rose 0.3% to 144.27 per dollar
cryptocurrencies
Bitcoin is little changed at $30,400.96
Ether is up 4.3% to $1,927.95
Bind
The 10-year government bond yield fell three basis points to 3.81%
The 10-year German government bond yield fell two basis points to 2.39%
The 10-year UK government bond yield was little changed at 4.39%.
raw materials
West Texas Intermediate crude rose 1% to $70.57 a barrel
Gold futures were up 0.5% to $1,927.60 an ounce
This story was created with the support of Bloomberg Automation.
– Featuring Rob Verdonck, Tassia Sipahutar, Robert Brand, Denitsa Tsekova, Peyton Forte, Ryan Vlastelica, Carmen Reinicke and Elena Popina.
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