The Nasdaq Composite posted its best first half of the year since 1983 as investors flocked to companies in the technology index that expect to benefit from the growth of artificial intelligence.
The index rose 32% for the first six months of 2023 after markets closed on Friday, the last day of June. For each half year, first or second, the Nasdaq recorded its strongest performance since the peak of the dot-com bubble in the second half of 1999.
US stock markets have weathered a series of challenges since January, including turmoil among regional banks, struggles over the government debt ceiling and higher interest rates imposed by the Federal Reserve and other monetary policymakers.
The biggest contributors to the market rally are a handful of big tech companies: Apple, Amazon, Microsoft, Nvidia, Alphabet, Meta and Tesla. On Friday, Apple hit a new record, valuing the company at more than $3 trillion, while chipmaker Nvidia has nearly tripled its price since the start of the year.
The Nasdaq rose more than twice the 16 percent gain of the broader S&P 500 index since the start of the year, highlighting the effects of big technology groups. If all stocks in the S&P 500 were equally weighted, the index would rise by a much more modest 5% for 2023.
“We’ve had some slowdown in inflation, which is clearly supportive of equities, and clearer messages from central banks. This increased security helped tremendously. . . but in the US in particular it was really the ‘Magnificent Seven’ that drove most of the gains,” said Sinead Colton Grant, head of investor solutions at BNY Mellon Asset Management, referring to the big seven technology groups.
The rally’s lack of breadth has left some analysts and investors skeptical that the gains will continue, especially given concerns that the Fed’s continued efforts to reduce inflation will push the economy into recession.
“If you believe the Fed is going to be able to slow the economy, it’s hard to make a case for where the stock market is,” said Greg Davis, managing director and chief investment officer at Vanguard. “Something is wrong right now.”
In its first-half review earlier this week, asset manager BlackRock said the recent performance of US stocks had been “unusual” but that did not mean a turnaround was imminent.
Tony DeSpirito, BlackRock’s chief investment officer for fundamentals, said the recent enthusiasm around AI is more genuine than the hype surrounding other new technologies.
“Demand is really real. You can compare what’s happening in AI with (the enthusiasm for) the metaverse or virtual reality a year or two ago. The orders are indeed there. Revenue growth is coming,” he said.
Markets were helped on Friday by a decline in the core personal consumption expenditure price index, the US Federal Reserve’s preferred gauge of inflation. The S&P and Nasdaq rose 1.2 percent and 1.4 percent, respectively, for the day.
European blue-chip indexes also posted gains in the first half of the year as investors bet that inflation would slow and the European Central Bank’s historic tightening campaign would peak. The pan-European Stoxx 600 closed the half nearly 9 percent higher, including a 1.2 percent gain on Friday.
France’s Cac 40 and Germany’s Dax gained 14% and 16% respectively in the first half, although Britain’s FTSE 100 lagged behind with a 1% gain. The FTSE was troubled by persistently high inflation in the UK and the index’s disproportionate exposure to falling oil prices.
Upbeat inflation data released on Friday helped euro zone stocks end the quarter at record highs. The core rate of price increases across the currency bloc eased more than expected to 5.5 percent in June, fueling optimism that the ECB may end its rate hike program earlier than expected.
However, core inflation — which strips out volatile energy and food prices — rose, which BNY Mellon’s Colton Grant said was worrisome.
“We are constructive on US stocks, we like moderate inflation.” . . and are increasingly confident that the likelihood of a recession is diminishing. . . (but) we are much more cautious about Europe, especially (the eurozone). This view is driven by sticky inflation and the fact that the ECB will need to increase more.