Interactive Investor

Top tech index surges over 80% to record high

18th July 2023 14:19

by Graeme Evans from interactive investor

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This year’s gains on Wall Street have largely been driven by these tech giants, but one expert believes it may be to rotate into cyclical laggards. Here’s why.

Technology concept 600

Investors have been urged to seek “compelling opportunities” outside US mega-cap stocks after the top-heavy outperformance of Wall Street markets continued last night.

Just seven companies including Apple Inc (NASDAQ:AAPL) and NVIDIA Corp (NASDAQ:NVDA) have driven three-quarters of this year’s returns for the S&P 500 index, which has jumped 18% year-to-date in contrast to the flat performance of the FTSE 100 index.

The New York FANG+ benchmark, which contains the five original FAANG stocks - Facebook owner Meta Platforms Inc Class A (NASDAQ:META), Apple, Amazon.com Inc (NASDAQ:AMZN), Netflix and Google (Alphabet (NASDAQ:GOOGL)) - as well as Tesla Inc (NASDAQ:TSLA), Snowflake (NYSE:SNOW), Nvidia, Microsoft  (NASDAQ:MSFT) and Advanced Micro Devices (NASDAQ:AMD), has jumped more than 80% this year and closed at a record high last night.

The excited reaction to Nvidia’s recent big upgrade to earnings guidance as companies raced to apply generative AI into their products and services has helped fuel the surge.

There’s also been increased hope for “Goldilocks” type conditions in the US economy as the direction of interest rates begins to turn and the jobs market remains healthy. It’s likely the current second-quarter earnings season could also mark the trough for earnings.

The challenge for many stocks is that much of this is already priced into their valuations, meaning the next move for investors may be to rotate into cyclical laggards as the potential biggest beneficiaries of a soft landing.

Within this group, UBS prefers US energy and industrial groups alongside consumer staples among the more defensive sectors.

It notes that the S&P 500 is trading at almost 19.5 times consensus forward earnings, even though expected profit growth of 6% is much lower than the solid double-digits seen in previous times of lofty valuations.

However, it adds that the forward price/earnings multiple is a more reasonable 16.7 times without the seven mega-cap tech companies that have driven about 75% of the S&P 500 return this year. As well as Apple and Nvidia, the others behind this momentum are Alphabet, Amazon, Meta, Microsoft and Tesla.

UBS said: “This underscores both the narrowness of the rally, and our view that investors can find more compelling opportunities outside of mega-cap tech.”

The bank thinks that some consolidation for the S&P 500 is likely, based on its June 2024 target of 4,400 compared with 4,522 at today’s opening bell. The earnings per share estimates for the S&P 500 are unchanged at $215 and $235 for this year and 2024 respectively.

UBS said: “Our numbers reflect a softening in the labour market later this year and some headwinds from the tighter bank lending standards. If the unemployment rate stays around current levels for the balance of the year, there could be some upside to our estimates.

“While we acknowledge the more resilient economic data, the strong year-to-date market gains seem to already reflect a better outlook.”

Over the past six weeks, the S&P 500 is up nearly 8% in the best performance leading up to an earnings season since the first quarter of 2021.

The results so far have been solid, with Bank of America reporting that the earnings beat rate is above average at 77% but weaker than the previous quarter’s 90%.

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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