A banner year for stocks is drawing to a close, with gains in big tech leaving the market near all-time highs amid the artificial-intelligence exuberance and dovish Federal Reserve bets.
On the eve of Wall Street’s final closing bell of 2023, the Nasdaq 100 marched toward its best year since 1999 after a $7 trillion surge. The S&P 500 approached a record — and is roughly 1% below the average full-year gain predicted in a recent survey with analysts, who forecast the index would end 2024 at 4,833.
“If the stock market can break through that record high in any significant way as we move through January, it’s going to be very bullish on a technical basis,” said Matt Maley at Miller Tabak + Co. “Whenever the market is rallying strongly at the beginning of a new year — when a lot of people are adjusting their investment-game plans — it tends to exacerbate the rally.”
In a rates-obsessed world, the stock market saw a massive reversal this year after suffering its worst annual selloff since 2008. As traders ramped up bets the Fed is done with its hiking campaign — and will start easing policy in 2024 — global bonds are set for their biggest two-month gain on record.
The S&P 500 traded just a few points away from its all-time high of 4,796.56 — extending its 2023 advance to 25%. Treasuries dropped after a weak $40 billion sale of seven-year notes. The dollar rose against most of its developed-market peers. The yen climbed as Bank of Japan Governor Kazuo Ueda continued to prepare the ground for the nation’s first rate increase since 2007.
From Nvidia Corp. to Microsoft Corp., the seven largest US tech stocks were responsible for 64% of the gauge’s rally this year through last week as the AI frenzy took off. The Nasdaq 100 is up 55% this year.
The ‘Magnificent Seven’ — which also includes Amazon.com Inc., Apple Inc., Google parent Alphabet Inc., Meta Platforms Inc. and Tesla Inc. — are expected to post 22% earnings growth next year, twice the S&P 500’s advance, data compiled by Bloomberg Intelligence show. The key is how much of that is already baked into share prices, especially with expectations for a soft landing building.
“Companies that have a defined and clear AI strategy with easy-to-follow metrics will likely continue to do well in 2024,” said Michael Landsberg at Landsberg Bennett Private Wealth Management. “Companies that have a hard time explaining their AI value proposition will not see a repeat of 2023, where most large tech was buoyed by the excitement and not necessarily the details of AI.”
Investors have flocked to big tech in part on bets that they are best positioned to capitalize on AI due to their vast scale and financial strength.
Those bigger profits have brought valuations down from nosebleed levels — but they’re still lofty. The Nasdaq 100 is priced at about 25 times profits projected over the next 12 months, according to data compiled by Bloomberg. While that’s down from a peak of 30 in 2020, it’s well above the average of 19 times over the past two decades.
Although there has been a relatively high number of stocks with gains of over 100%, there haven’t been many outperforming the S&P 500, Bespoke Investment Group noted. In a typical year, on average, 48.7% of the benchmark’s members post larger gains than the index itself. In 2023, less than 30% of its members are outpacing the index.