Market snapshot: can incredible US tech rally continue in second half?

After a stunning rally in the first half of 2023, America's tech giants will remain in the spotlight as investors bet on peak interest rates. Our head of markets has the latest thinking.

US markets finished the half-year in some style, driven in particular by the mega-cap technology stocks which have come to typify hopes that an end to the rate hiking cycle is firmly in sight.

The Nasdaq rose in brisk trading to record its strongest first half of the year since 1983, with Apple Inc (NASDAQ:AAPL) closing to finish with a market cap of over $3 trillion, and with NVIDIA Corp (NASDAQ:NVDA) having added almost 189% over the last six months.

Other tech stalwarts such as Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) also joined the party, leaving the Nasdaq posting a gain of 32% in the year to date.

• Learn more: SIPP Portfolio Ideas | How SIPPs Work | Transfer a SIPP

Hopes that the Federal Reserve now has an end game has prompted a surge in buying interest in the tech sector, although the second half of the year could pose questions as valuations and results will be scrutinised given these higher expectations. Even after the bumper start, the Nasdaq remains some 14% lower than the record highs it achieved in November 2021.

Sentiment received a further boost after the release of the Personal Consumption Expenditures index, which showed another slight slowing of inflation in May. A rise of just 0.3% in core inflation was in line with expectations, while the annualised figure rose by 4.6%, slightly better than estimates. Although it is widely accepted that there will be a further rise in interest rates this months and the possibility of one more to come this year, investors are becoming increasingly hopeful that the Fed is now getting its ducks in a row, with the ongoing resilience of the economy increasingly pointing to the ideal outcome of a soft landing.

Another set of tests will inevitably follow this month, starting with the non-farm payrolls figure this Friday. Expectations are that unemployment will be largely unchanged, with 225,000 jobs having been added in June as compared to 339,000 the previous month. Next week, the half-yearly reporting season will kick off in earnest, traditionally led by the banks. An overall drop of around 6% in earnings is expected as some of the effects of the rate rises so far begin to filter through to ground level.

In the meantime, the first half of 2023 can be viewed as a success for investors. Quite apart from the Nasdaq having notched such a strong gain, the technology-exposed S&P500 also added 16%, while the more traditional Dow Jones index rallied at the last to finish up by 3.8% so far this year.

• What Zuckerberg’s Meta Platforms could really be worth
• Scottish Mortgage: our latest thinking on AI, Elon Musk and China
• Investors expecting to make returns comfortably ahead of inflation in 2023

Asian markets were also generally buoyed by the news, with demand for tech shares boosting Japan’s Nikkei index. A Bank of Japan survey indicated improving business sentiment following a post-pandemic boost and improving supply chain constraints.

For China meanwhile, where its prime index has lagged other indices in the developed world over the last quarter, a manufacturing survey showed slowing growth once more, accentuating a trend which has come to dominate investor attention. While hope remains for more stimulus from the authorities to stem tepid sentiment from the consumer, the more central issues in need of remedy include both youth unemployment and the property sector.

UK markets kicked off the second half with early gains, attributable in part to the positive news coming from the US and a marginally weaker sterling. The tentative return to something of a risk-on approach was reflected by buying interest in the miners, while banks saw some relief after a recently turbulent time and ahead of their half-year reporting season at the end of this month.

• Shares for the future: five factors I use to score shares
• Merryn Somerset Webb: the scariest chart in the world
• Cash or shares? What the data tells us about where to invest

The FTSE100 has neither sustained the strength of earlier year gains nor reflected the bounces of other global indices and is now ahead by just over 1% in the year to date.

Questions over the UK economy also weighed on the FTSE250 in particular towards the end of the half year. Despite a reasonably positive performance in early trade, the index has seen any previous gains erased and is now down by 2.1% so far this year as the likelihood of more interest rate rises weigh against tepid economic growth, implying a recession although the severity of such a slowdown remains under debate.