The breathtaking rally in tech megacaps gained further traction, with the Nasdaq 100 poised to notch a historic first-half of a year and Apple Inc. hitting the $3 trillion milestone.
(Bloomberg) — The breathtaking rally in tech megacaps gained further traction, with the Nasdaq 100 poised to notch a historic first-half of a year and Apple Inc. hitting the $3 trillion milestone.
Traders decided to look at the glass half full after data showed signs inflation is moderating at the expense of economic growth. As the market continued to climb a wall of worry, major equity benchmarks gained, with tech consolidating this year’s leadership amid the stratospheric ascent of artificial intelligence.
Nearly $5 trillion has been added to the value of companies in the Nasdaq 100 since the start of the year, with the tech-heavy gauge defying bubble warnings and soaring almost 40%. The surge in the most-influential group in the S&P 500 has helped push the index up 16% in 2023. Gains have been even more pronounced when narrowed down to the megacap space — which has soared almost 75%.
“I still do like big tech,” Larry Adam, chief investment officer at Raymond James, told Bloomberg Television. “I do believe in technology continuing to reinvent itself — obviously with the latest addition being AI. That’ll continue to drive earnings.”
The “Big Seven” — including Apple, Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Nvidia Corp. and Tesla Inc. — boosted profits by 14% a year during the decade through 2022. While their combined earnings slumped more than 20% last year, they’re expected to recover swiftly, rising at least 15% in the next two years. Profits will reach $362 billion in 2024, surpassing the previous peak of $336 billion in 2021.
The Nasdaq 100 rose about 1.5% Friday, while the S&P 500 headed toward its highest since April 2022. Nvidia, which has roughly tripled this year amid the AI frenzy, was up nearly 3.5%. Wall Street’s favorite volatility gauge, the so-called VIX, extended this year’s plunge to hover near 13.
If history is any guide, the Nasdaq 100’s strength this year augurs well for the rest of 2023.
Years that start with rallies in the index of at least 10% average returns of about 14% over the second half of the year, though that shrinks to an 8.3% gain when the first-half gain tops 20%, according to an analysis of data compiled by Bloomberg.
The market’s fascination with the power of generative AI has trumped every major issue that could potentially drag down sentiment this year: recession fears, elevated levels of inflation, prospects for more Federal Reserve hikes, geopolitical risks, the debt-ceiling debate and the collapse of a few regional banks.
While the rally in AI has drawn comparisons with the dot-com bubble of 2000, when the market was driven by a similarly narrow breadth of technology stocks before a crash, BlackRock’s Tony DeSpirito said earnings growth is coming.
“Demand is really real,” said DeSpirito, BlackRock’s chief investment officer of US fundamental equities. “I think that contrasts what’s going on in AI versus the metaverse a year ago, or virtual reality. The orders are there.”
Still, after such a strong rally, there’s the growing concern about valuations, which has recently spurred a surge in bearish bets against the largest tech companies. Short interest as a percentage of shares available to trade is near 12-month highs for Microsoft, Tesla and Amazon, according to data compiled by S3 Partners.
‘Be Selective’
“We don’t believe the AI trend is a bubble, but advise investors to be selective on AI-related stocks after the strong year-to-date rally,” said Sundeep Gantori, equity strategist at UBS Global Wealth Management. “From a positioning point of view, we recently closed our self-help theme as we see better risk-reward in mid-cycle industries (software, internet) and tech laggards.”
Also helping tech on Friday was the fact that action in the bond market was subdued. Treasury 10-year yields fell below 3.85%. The dollar dropped, extending this year’s losses.
Key measures of US inflation cooled in May and consumer spending stagnated, suggesting the economy’s main engine is starting to lose some momentum. The personal consumption expenditures price index, one of the Fed’s preferred inflation gauges, rose 0.1%. From a year ago, the measure stepped down to 3.8%, the smallest annual advance in more than two years.
“The May PCE report released today is relatively benign from a Fed perspective and leans in the direction of the Fed ultimately delivering only one more rather than two more rate increases,” said Krishna Guha, vice chairman of Evercore ISI. “This should curb a bit the recent back-up in yields and favor big tech.”
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.1% as of 12:38 p.m. New York time
- The Nasdaq 100 rose 1.6%
- The Dow Jones Industrial Average rose 0.7%
- The MSCI World index rose 1%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.5% to $1.0916
- The British pound rose 0.8% to $1.2708
- The Japanese yen rose 0.2% to 144.45 per dollar
Cryptocurrencies
- Bitcoin fell 0.4% to $30,264.86
- Ether rose 1.5% to $1,876.07
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.82%
- Germany’s 10-year yield declined two basis points to 2.39%
- Britain’s 10-year yield was little changed at 4.39%
Commodities
- West Texas Intermediate crude rose 0.8% to $70.42 a barrel
- Gold futures rose 0.4% to $1,925.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rob Verdonck, Tassia Sipahutar, Robert Brand, Denitsa Tsekova, Peyton Forte and Ryan Vlastelica.
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