US stockmarket parties like it’s 1999
Stockmarkets are “partying like it’s 1999”, says Randall Forsyth in Barron’s. In a rally with “shades of the dotcom boom”, US equities are being powered higher “by a relative handful of technology stocks” that investors are betting will “fundamentally change the world”.
On Monday, America’s S&P 500 briefly achieved a 20% gain from its lows of October last year. Such a rise from a trough is the commonly accepted definition of a bull market. Thus reaching that milestone would often be considered sufficient to mark “the end of the gnarly bear market” that began in the summer of 2022, says Matt Phillips of Axios. Yet not everyone agrees that the bear is dead.
Some market watchers believe that “the market has to hit a new high before we can confirm that the current market qualifies as a bull”. By that criterion, the S&P 500 remains about 10% short of its December 2021 record.
Boosted by earnings
US stock prices have been boosted by unexpectedly strong earnings, say John Authers and Isabelle Lee on Bloomberg. Thank resilient sales and lower energy costs, plus a weakening dollar, which flatters overseas earnings in dollar terms.
However, if October did mark the bottom, then the 2022 bear market was shorter than average at just 195 days: bear markets typically last roughly a year. And there are other reasons why many investors remain convinced. “Bull markets start when stocks are cheap”, but even at their October nadir, US stock valuations were still historically expensive.
Nvidia, whose computer chips are used in the much-hyped field of artificial intelligence (AI), is the star of the new boom, says Joe Rennison in The New York Times. The shares have surged by 170% this year, taking its market capitalisation close to $1trn. The average stock in the S&P 500 has risen by less than 3%, while some 90% of the index’s gain this year has come from just seven firms: Amazon, Apple, Meta, Microsoft, Nvidia, Tesla and Alphabet.
What if Big Tech stumbles?
Add Netflix to that list and the eight biggest tech “stars” account for 30% of the S&P 500’s entire market capitalisation, says Caitlin McCabe in The Wall Street Journal. That is up from 22% at the beginning of the year. Such a “narrow” stock rally does not make for a healthy bull market. It means if Big Tech stumbles, then it will sink the whole stockmarket along with it, as happened during an abrupt tech sell-off in September 2020.
For all the worry about the narrow market, it should be noted that “there have been long-lasting top-heavy rallies in the past”, most recently between 2019 and 2021, say Thomas Mathews and Harry Chambers of Capital Economics. Those rallies can eventually “broaden” out to a wider range of stocks if investors sense that the economy is improving. But that’s not the case this time: growth is on course “to falter later this year” while interest-rate hikes are still biting. Should economic activity slow, then “some pain is on the way for the S&P 500, and global equities generally”.