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A return to Big Tech stocks while has helped the broader market through the year.
The S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) is up nearly 10%, while the equal-weighted S&P (RSP) has gained a little more than 1%.
The Big Tech really has enjoyed the enthusiasm for AI, especially with the quick use of ChatGPT.
“The SPX seems increasingly divorced from decelerating consumer trends and other major indices (except the NDX 100 (QQQ)) due to the uber-cap AI premium for some of the SPX’s largest weightings (top 5 stocks: 21%),” Wells Fargo’s Chris Harvey wrote. “This reminds us of 1999/2000, when Growth (IWF) outperformed Value (IWD) but Fed tightenings rolled the economy – and ultimately, Tech stocks.”
“We are strongly of the view that AI will change the world,” Deutsche Bank’s Jim Reid wrote. “The things we’ve seen from chatGPT and read about with regards to the technology suggests its going to be a game changer. ChatGPT was launched on November 30th last year and as you can see this closely coincides with the surge in the ten US mega-cap tech stocks.”
Deutsche Bank designates those 10 as Microsoft (MSFT), Apple (AAPL), both shares of Alphabet (GOOG) (GOOGL), Meta (META), Visa (V), Mastercard (MA), Nvidia (NVDA), Netflix (NFLX) and Adobe (ADBE).
“Stocks associated with AI such as Nvidia (+108% YTD), and Microsoft (+30.6% YTD) have surged and have taken tech along for the ride (lower yields have helped a bit too),” Reid said. “These ten are up +33.3% YTD and have helped the S&P 500 be +8.0% YTD so far. (Price only moves).”
“Many people have asked why equities aren’t pricing in a recession if people like us think it’s so likely. The main answer is two-fold; a) Equities tend not to fall much (if at all) in advance of a recession, but fall sharply in the first half of its arrival, and b) mega-cap tech has such a dominant weight in the S&P 500 that it can help the index march to a different beat.”
“However if you strip out these 10 mega-cap tech stocks, the ‘S&P 490’ is actually -0.5% YTD,” Reid added. “So those ten mega cap tech stocks have increased the return of the index by 8.5pp so far this year and have turned a potentially disappointing year into a very decent one for trackers and those who simply view the S&P 500 as a bellwether for global risk.”
“You could read this two ways; 1) that the “real” economy stocks are treading water and reflecting the risk of tougher times ahead, or 2) that the surge in tech is helping keep financial conditions from tightening as much as it should be on a cyclical basis. If you believe the second point could it help avert a recession?”
“Doubtful in our eyes but it is something to keep an eye on,” Reid said.
Baby bubble
“The Biggest Picture: AI for now (is) a ‘baby bubble,'” BofA strategist Michael Hartnett wrote.
There are “bubbles in right things (e.g. internet) & wrong things (e.g. housing) always started by easy money, always ended by rate hikes,” Hartnett said.
With the “new AI mania + 5% inflation, 3% unemployment, 7% budget deficits in ‘23” the “biggest ‘pain trade’ next 12 months is fed funds rate at 6% not 3%.”
BofA define its Big 7 US Tech as Apple, Microsoft, Google, Amazon (AMZN), Nvidia, Meta and Tesla (TSLA).
As the “Nasdaq (COMP.IND) bubbled to 5000 in 1999, Treasury yields rose v sharply 200bps (one definition of a ‘bubble’ is when an asset price ignores a rise in the cost of capital),” while “in 1999 internet stocks & strong macro forced Fed to restart monetary tightening,” Hartnett said.
The “bubble popped 9 months later; AI = internet, and if Fed (is) mistakenly pausing in 2023, US bond yields (TBT) (TLT) (SHY) (IEF) (US2Y) (US10Y) would tell you that by rising back above 4%, and if so we most certainly ain’t seen last Fed rate hike of the cycle.”
“Near term, technicals and the upcoming MSCI Momentum (MTUM) rebalance likely will continue to support uber-cap outperformance,” Wells Fargo’s Harvey said.
