caroline valetkevich
NEW YORK (Reuters) – Wall Street's rally to record highs will be tested in the coming weeks as heavily weighted U.S. technology companies begin reporting their results in the final quarter of 2023.
The S&P 500 index's rally, which hit a record high for the second year in a row at Monday's close, was driven in part by gains in chip makers and other tech stocks amid optimism around artificial intelligence.
The S&P 500 rose 24% in 2023, while the tech-heavy Nasdaq rose 43%.
Fourth-quarter profits for all S&P 500 companies are expected to rise 4.5% from a year ago, while the index's communications services sector is expected to increase 49% and 17% year over year, according to LSEG data on Friday. The information technology sector is expected to see an increase, with the consumer goods sector seeing a 23% increase.
Strategists say the performance of the Magnificent Seven, a group of mega-cap companies including Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Metaplatforms and Tesla, as well as other large tech companies, is key to earnings prospects. This year's market.
“Given that the market rally was centered around the big tech companies, a lot is expected of them,” said Quincy Crosby, chief global strategist at LPL Financial in Charlotte, North Carolina. Stated.
Valuations are “high no matter how you look at it,” he said. Based on data from LSEG Datastream, the S&P 500 Index's 12-month forward earnings are running at 19.7x, well above the long-term average of 15.6x.
Analysts expect S&P 500 earnings to rise just 2.8% in 2023, but 11% in 2024, according to LSEG data.
Lisa Charette, chief investment officer and head of global investments at Morgan Stanley Wealth Management, said in a note Monday that the overall market is already at record highs, so a recovery from this may be difficult. .
“Equity market gains could stall in 2024, as futures multiples have already reached historic highs and earnings forecasts for the next 12 months are ambitious,” he said. “This is because the improvement in performance is commensurate with the reduction in valuation multiples inherent in mid-cycle or soft-landing environments.”
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Wall Street's gains were also fueled by expectations that the U.S. Federal Reserve will cut interest rates in the coming months, cutting costs for businesses and consumers. This tends to help technology companies that don't have a long track record of profitability.
The group has rebounded after Taiwan Semiconductor Manufacturing Co., the world's largest contract semiconductor manufacturer, announced last week that there was strong demand for high-end chips used in AI, and this earnings season has seen chip makers may attract attention.
The semiconductor index, which rose 65% last year, recently hit an all-time high.
Results are expected to be announced this week, with Netflix late on Tuesday, Tesla on Wednesday and chipmaker Intel on Thursday.
Microsoft and Alphabet will report their earnings next week, with both scheduled to be released on January 30th, while Apple, Metaplatform and Amazon.com are scheduled to report their results on February 1st. Nvidia, the world's most valuable chipmaker, plans to make an announcement in late February.
Nvidia, considered a leading supplier of processors used in AI computing, announced on January 8 a new AI-powered desktop graphics processor. The company's stock price is at an all-time high, up more than 20% so far this year.
The seven Magnificent stocks accounted for about 62% of the S&P 500's total return in 2023, according to S&P Dow Jones Indices.
Some investors said that despite the big rally, optimism about tech stocks and AI remains strong.
“Tech stocks continue to energize the market and have reached a point where they're likely to generate more interest,” said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey.
(Reporting by Caroline Valetkevich; Editing by Alden Bentley and Muralikumar Anantharaman)
