Investors are celebrating the surge in tech stocks in 2023 as though last year — the worst year for risk markets in decades — never happened.
They could be forgiven.
The Nasdaq 100 (^NDX) just entered a new bull market and is about to notch its best first-quarter return since 2012 — up 18.5% with one day to go. Apple (AAPL) and Amazon (AMZN) are each up over 20% this year, while Tesla (TSLA) has surged nearly 60%, and Meta Platforms (META) is up over 70%. Chipmaker Nvidia (NVDA) is approaching an eye-watering 90% return this quarter — its best in over two decades.
Markets have seemingly entered a time warp — where last year's losers are this year's winners, and vice versa. Tech stocks are bringing the FAANG vibes from 2021 and before.
But peering under the market's hood reveals some critical differences between 2023 and the prior era of preternaturally low interest rates when FAANGs flourished.
First, the bond market has been turned on its head since the Fed began furiously raising rates a year ago. The 40-year down trend in interest rates that existed prior is now reversing.
Markets never go straight up (or down), but a reprieve this year from higher rates has facilitated an echo of the prior era with tech stocks surging as interest rates wane. Suffice to say, knee-jerk reversions to the mean do not a trend make.
Second, concentration worries are surfacing again. Investors may remember concerns that megacaps were accounting for a disproportionate share of the gains in the major indices during certain stretches from 2017 to 2021.
Those concerns are back, though for different reasons.
Currently, the top ten Nasdaq 100 stocks account for nearly all of the gains this year in the Nasdaq 100 (88%). Apple and Microsoft alone account for 13.2% of the S&P 500's composition, the highest level since Ma Bell (T) and Big Blue (IBM) ruled the roost in 1978.
Companies no longer have access to cheap capital. The longer rates stay high, the more small companies will fail. The Nasdaq 100 is outperforming its broader cousin, the Nasdaq Composite (^IXIC), by 375 basis points this year, which reflects this strength of its higher-market cap constituents.
To illustrate just how long these things can play out, recall that stat about Nvidia from above.
The chipmaker is about to post its best quarter since the fourth quarter of 2001, when it soared 144%. That monster rally began in the midst of a U.S. recession and a bear market in the Nasdaq that spanned three years. The following year in 2002, Nvidia would go on to crash 90% (top to bottom) before finding its footing in October.
Currently, there are a few tailwinds that could boost the major indices further. Investor sentiment is skewing bearish, which is complementary to bulls in a contrarian fashion. And even with recent gains, the best-performing index, the Nasdaq 100, isn't yet overbought according to market technicals on all but the shortest time frames.
But longer-term, investors must contend with (1) an economy that has yet to fully adjust to the reality of materially higher rates versus 2021 and before, and (2) a Fed that has so far kept its hawkish promises.
Markets don't like uncertainty. Unfortunately, it's still uncertainty that reigns.
What to watch today
Economy
- Personal income, February (+0.3% expected, +0.6% previously); Personal spending, February (+0.3% expected, +1.8% previously); MNI Chicago PMI, March (43.9 expected, 43.6 previously); University of Michigan consumer sentiment, March (63.4 expected, 63.4 previously)
Earnings
- No notable companies set to report.
