Interactive Investor

Can Wall Street’s record run continue?

When stock markets hit new highs investors can sometimes get nervous and decide to sell, but that’s not always the best course of action. City writer Graeme Evans explains.

23rd January 2024 13:50

by Graeme Evans from interactive investor

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Couple discussing US stock market in New York 600

Wall Street’s record high is not necessarily a “sell” signal, a leading bank said today after it revealed the S&P 500 index typically goes on to post further gains.

Over 60 years, UBS Global Wealth Management notes average returns of 12%, 23% and 39% in the respective one-, two- and three-year periods following a new all-time high.

The S&P 500 closed at a record 4,850 last night and is seen in UBS’s base case finishing this year at 5,000, but with scope for greater gains if economic growth surprises on the upside.

It does not expect a repeat of 2023’s performance, when the S&P 500 rallied more than 20%, and adds that it is possible that stocks may enter a “digestion phase” in the near term.

UBS told clients this morning: “We do believe the rally can extend a bit further throughout the course of this year, supported by further evidence of a US soft landing and by healthy earnings growth.”

Its optimism is underpinned by the investment case for artificial intelligence (AI) and related companies, especially those in the semiconductor industry.

The bank forecasts global AI revenues will grow 15-fold between 2022–27 from $28 billion to $420 billion, driven by particularly strong demand for AI computing and graphic processing unit chips in the next 12–18 months.

In October, UBS turned positive on global semiconductor manufacturers given its view of robust and broadening AI demand.

Nothing has changed since then to alter its view that chip and software industries are well positioned to ride the AI wave.

It said: “We expect both industries to post solid double-digit profit growth (50% profit growth for semiconductors and close to 20% for software) and expect operating margins of more than 30% in 2024.”

Global semiconductor firms are trading at a premium of about 25% to their five-year average, but on 22 times forward earnings this represents a 10–15% discount to global tech.

The sector has remained resilient this year, with the Nasdaq 100 up 3% so far after a 54% rally in 2023. The positive trends come after Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) forecast faster adoption of AI and booming demand for high-end chips, while Meta Platforms Inc Class A (NASDAQ:META) founder Mark Zuckerberg recently indicated his firm will ramp up spending on NVIDIA Corp (NASDAQ:NVDA) AI chips.

In last night’s latest record-breaking session, the Dow Jones Industrial Average closed above the 38,000 level for the first time, as US investors welcomed resilient recent data and signs that US interest rate cuts are not far away.

The fourth-quarter results season has also got off to a robust start, with FactSet revealing that 62% of the early reporters in the S&P 500 have delivered a positive earnings surprise.

But with an increasingly optimistic outlook already being priced in, Deutsche Bank cautioned today it is getting harder to achieve fresh upside outcomes from a market perspective.

Macro strategist Henry Allen said: “We've had a lot of good economic news over recent months, which has been very welcome for markets.

“But with the good news being priced in, and financial conditions now at accommodative levels, it may be difficult to maintain this optimism for long.

“Moreover, given the number of leading indicators that still point in a negative direction and inflation still above target levels in several countries, there are still plenty of reasons to remain cautious.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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