As the bells rang in the new year, America’s tech sector was on its knees, and few would have predicted this outcome. A magic May extended the recovery even further.
Excitement about AI led to a massive outperformance among tech stocks in May as Wall Street’s index of mega-caps jumped 17% and semiconductor giant NVIDIA Corp (NASDAQ:NVDA) by 36%.
The showing offset an otherwise challenging month for investors due to significant events ranging from more turmoil among US regional banks to fresh interest rate hikes by major central banks and the ongoing uncertainty over the US debt ceiling.
The selling in May left the FTSE 100 index more than 5% lower, the Dow Jones Industrial Average off by 3%, Europe’s STOXX 600 down 2.3% and the Hang Seng 7.9% weaker.
The poor relative performance of London’s top flight wasn’t helped by its leaning towards resource stocks after commodity prices fell on concerns about the global outlook.
Tech booms while commodities struggle
In their monthly review, Deutsche Bank strategists said Bloomberg’s Commodity Spot Index ended May at its lowest level since August 2021, with Brent crude oil prices down 8.6% and continuing their run of declines in every month so far in 2023.
There were also losses among metals after falls of 1.4% for gold and 6% for copper, as well as for agricultural goods with declines for wheat of 4.1% and 6.6% for corn.
In contrast to Europe’s weaker performance, the S&P 500 was broadly unchanged and the Nasdaq rose 5.9% in May to leave the tech benchmark one of the best year-to-date performers with a 24.1% gain in total return terms.
This reflected tech excitement after Nvidia raised its outlook far above expectations as companies raced to apply generative AI into products, services and business processes.
The company, which designs Graphics Processing Units used in the gaming, mobile and automotive industries as well as in enterprise data centres, is now worth close to $1 trillion after shares surged more than 150% this year.
Nvidia is one of the members of the FANG+ index of 10 mega-caps, the others being the five core FAANG stocks - Facebook owner Meta Platforms (NASDAQ:META), Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), Netflix Inc (NASDAQ:NFLX) and Google (Alphabet (NASDAQ:GOOGL)) - plus Tesla Inc (NASDAQ:TSLA), Snowflake (NYSE:SNOW), Microsoft Corp (NASDAQ:MSFT) and Advanced Micro Devices Inc (NASDAQ:AMD).
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That index is now up 61% in the first five months of the year, further assisted by a doubling in value for Facebook owner Meta. It was one of last year’s worst performers, shedding two-thirds of its value on concerns over rising costs, the advertising outlook and competition from other social media platforms.
The tech momentum has benefited FTSE 100-listed Scottish Mortgage (LSE:SMT) Investment Trust, whose shares have risen more than 8% in the past month. More than 3% of its portfolio is invested in Nvidia, with the overall joint biggest holding being the semiconductor industry supplier ASML (EURONEXT:ASML) at 7.8%.
For investors in the tech sector and beyond, the outlook is clouded by the likelihood that central banks are still not done raising interest rates. The Federal Reserve is seen as delivering at least one more increase, with futures markets seeing a 83% chance by the July meeting.
Stock markets were broadly flat today, but Deutsche Bank strategist Jim Reid warns that June has been the second-worst month on average for the S&P 500 (only behind September) over the last 15 years.
He said: “On a purely seasonal basis it isn’t looking too promising. Will AI mean that it’s different this time, or will the lagged impact of rate hikes really begin to start biting?”
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