The 493 ‘other’ stocks in the S&P 500 gained +3.7% during the first half of 2023, a gain that if predicted six months ago, would have seemed reasonable given the mix of macro variables at the start of January. Instead, the S&P 500 (SPX) generated a total return of +16.9%, fuelled by the 70% expansion in the P:E multiple accorded those other ‘7 macro cap tech’ stocks, with the first US$2T market company, Apple Inc., accounting for ~20% of the total gain in the index. Pundits attribute much of the recent five-week ramp in equities to investors’ thirst to be invested when the Fed is done hiking rates and the excitement radiating from artificial intelligence (“AI”).
While the story line for equities evolved during May 2023, the bottom line remained the same, as despite deteriorating market breadth, a handful of macro cap tech stocks enabled U.S. indices to close higher on the month. Hence, the S&P 500 (white line, right axis) exited May matching the price levels of mid-March 2022, back when the Fed initiated its series of rate hikes (red line, left axis). Washington’s end of month debt ceiling and spending agreement, plus the growing belief that a ‘not too hot, not too cold Goldilocks ‘economic environment may be unfolding in the U.S. (jobs data last week), undoubtedly played roles in the positive outcome. However, it strikes us that the role of large systematic buy programs should not be underestimated.
A mere gently slowing economy and ‘sticky’ inflation combined to cause late April, Q1 S&P 500 (SPX) earnings to print better than recently lowered estimates. This ‘beat’, combined with investor positioning focused on not wanting to miss the traditional ‘Fed is done’ rally, catalyzed the +2.87% surge in stocks during the last two trading days of the month, enabling the SPX to print a 2nd consecutive positive month.
A confluence of factors continues to catalyze choppy, rangebound markets as investors strive to determine whether the Fed will be able to bring inflation under control prior to the U.S. economy falling into a recession. The convergence of the two lines inside the yellow oval on the far right of the 60+ year graph below speaks to this dilemma facing fundamental investors. On the one hand, the Fed’s main inflation metric surprised last month (white line, right axis) to the upside, while last week’s ISM Manufacturing Index (red line, left axis) screamed recession.