Evening Brief – 11.28.23
Smooth Sailing?
The US equity market remains on track to outperform the other major asset classes by a substantial amount in 2023 led by the “mega-cap” tech rally. When these behemoths are removed from the equation, the year-to-date performance of US equities is a bit more sobering, comparable to the return on money-market funds.
U.S. market cap-weighted stocks, which are greatly influenced by big-tech companies, have been the best performers so far this year. The Vanguard Total US Stock Market Index Fund, for example, is up 19.2%.
The iShares Technology ETF, which is heavily weighted with companies like Microsoft, Apple, and Nvidia, has increased by more than 49%. A more accurate comparison follows how the average stock performs in an equal-weighted portfolio. For example, the Invesco S&P 500 Equal Weight ETF’s 5.4% year-to-date return is only marginally higher than the performance of a cash ETF such as the iShares Short Treasury Bond ETF or the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF.
While a correction in the technology sector is likely to offer enough impetus to push the major indices lower, any correction is typical and may indicate that the equities market will eventually rise further in the months ahead, as it will be a more durable rally. The gap that begs to be filled is above 4430 in the S&P500, which would correspond to the smallest correction from a similar setup witnessed in the middle of June.
David Kostin, chief US equity strategist at Goldman Sachs, remains optimistic on the technology sector. “Our baseline forecast suggests that in 2024 the mega-cap tech stocks will continue to outperform the remainder of the S&P 500.”
“Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025.”
With rising expectations that the Federal Reserve has concluded its monetary tightening cycle and will embark on a less restrictive stance in 2024, it’s easy to see how big-tech stocks could continue to rally.
Deutsche Bank analysts predict the central bank will cut interest rates by at least 100 basis points next year, according to its latest research. Current probabilities based on the CME FedWatch Tool are largely in line with this prediction, with a 62% chance of the first 25-basis point cut in May 2024, another quarter-point cut in June (84%) and a third one in July (93%).