Louis Krauskopf
NEW YORK (Reuters) – U.S. stock markets will start 2024 sharply higher as optimism about the economy and interest rate cuts, combined with enthusiasm for business opportunities in artificial intelligence, has stirred a powerful cocktail for stocks. It turns out.
The S&P 500 index is up more than 10% so far this year, posting its biggest first-quarter gain since 2019. The benchmark index in late January hit a record high for the first time in two years, based on a sharp rise in the second half of 2023. There was no looking back, and even after the start of 2024, the stock hit new highs more than a dozen times without any major declines.
In late February, the NASDAQ Composite Index, which has a high proportion of high-tech stocks, also hit its highest value since November 2021.
Key to this year's rally has been investors' confidence that the economy is poised for a “soft landing,” in which inflation moderates but a deep economic recession is avoided.
Nearly two-thirds of fund managers see a soft landing as the most likely outcome for the economy over the next 12 months, but a “hard Only 11% expected a “landing”.
Many investors were also encouraged by this month's dovish Federal Reserve meeting, where the central bank maintained the outlook for three interest rate cuts this year while improving the economic outlook.
Rising yields were a pressure point for stock markets in 2023, but stocks were able to buck the rise in Treasury yields. The yield on the benchmark 10-year U.S. Treasury bond has recently been around 4.2%, up from 3.86% at the end of last year.
“As the second quarter begins, we continue to see a more supportive near-term backdrop for risk-taking,” BlackRock Investment Institute strategists, who are overweight U.S. stocks, said in a note this week. “There is,” he said. “We think the upbeat risk appetite could extend beyond technology as more sectors adopt AI and market confidence increases with recent Fed messaging and significantly lower inflation.”
This optimism led to a rise in stock prices. The S&P 500's forward price/earnings ratio rose 21 times, the highest level in more than two years, according to LSEG Datastream.
The stock market will continue to be driven in 2023 by some of the very large companies that have taken the lead.
But after the Magnificent Seven's tech and growth stocks both posted strong gains in 2023, they went their separate ways this year.
Nvidia continues to shine, surging more than 80% so far this year, driven by its gold-standard chips for AI. Meta Platforms was another big winner this year, soaring 37%, and Facebook's parent company issued its first dividend in February.
Other megacaps haven't fared so well. Apple's stock price has fallen 11%, with the iPhone maker hurt by its Chinese operations and pressure from antitrust regulators. Tesla shares fell 29% on concerns about electric vehicle demand.
As of late last week, the Magnificent Seven accounted for 40% of the S&P 500's year-to-date gain, according to S&P Dow Jones Indices. Comparable mega-cap groups last year had a share of more than 60%.
Other stocks have also helped recover from this year's declines, indicating that gains are widening.
High tech and communications services (a combination of the five Magnificent Seven sectors) has been among the top S&P 500 sectors so far this year. But energy, financials, and industrial stocks also outperformed the S&P 500.
Anthony Saglimbene, chief market strategist at Ameriprise, said in Monday's market commentary that recent performance “suggests early signs that investors are starting to look for opportunities outside of Big Tech and in anticipation of lower interest rates later this year.” It shows,” he said.
Investors are also focused on which companies stand to benefit from greater use of AI.
Nvidia is the poster child for the AI craze, but a number of chipmakers and other tech stocks have also posted big gains, including Super Micro Computer and Arm Holdings. In the latest sign of AI fever, semiconductor company Astera Labs' stock price has more than doubled from its initial public offering price a week ago.
(Reporting by Louis Krauskopf; Editing by Megan Davis, Aurora Ellis and Jamie Freed)
