NEW YORK, March 28 (Reuters) – The U.S. stock market is
off to a soaring start in 2024, as optimism over the economy and
interest rate cuts has combined with exuberance about the
business opportunity in artificial intelligence to stir up a
potent cocktail for equities.
The S&P 500 has climbed more than 10% so far this
year to post its biggest first-quarter gain since 2019. The
benchmark index in late January hit its first record high in two
years, as it built on a surge in late 2023, and has not looked
back, setting more than a dozen highs without a significant
pullback so far in 2024.
The tech-heavy Nasdaq Composite in late February
also registered its first record high since November 2021.
Key to this year’s gains has been confidence from investors
that the economy is set for a “soft landing”, in which inflation
moderates but the economy avoids a severe downturn.
Nearly two-thirds of fund managers saw a soft landing as the
most likely outcome for the economy in the next 12 months, while
only 11% projected a “hard landing”, according to BofA Global
Research’s latest monthly survey published in March.
A dovish Federal Reserve meeting this month, in which the
central bank kept its view of three interest rate cuts this year
while upgrading its economic outlook, has also encouraged many
investors.
Stocks have been able to defy a rise in Treasury yields,
after rising yields were a pressure point for equities in 2023.
The yield on the benchmark 10-year Treasury was last
around 4.2%, up from 3.86% at the end of last year.
“As Q2 kicks off, we still see a more supportive near-term
backdrop for risk-taking….,” strategists at the BlackRock
Investment Institute, which is overweight U.S. stocks, said in a
note this week. “We think upbeat risk appetite can broaden out
beyond tech as more sectors adopt AI, and as market confidence
is buoyed by recent Fed messaging and broadly falling
inflation.”
Such optimism has helped drive up stock valuations. The S&P
500’s forward price-to-earnings ratio has climbed to 21, its
highest level in more than two years, according to LSEG
Datastream.
The stock market continues to be propelled by some of the
megacap companies that led the way in 2023.
But after all of the “Magnificent Seven” tech and growth
stocks posted huge gains in 2023, this year has seen them go
separate ways.
Nvidia continues to shine, surging more than 80% so
far this year fueled by its gold-standard chips for AI. Meta
Platforms is another big winner on the year, jumping
37%, with the Facebook parent issuing its first dividend in
February.
Other megacaps have not fared so well. Apple shares
have slipped 11%, with the iPhone maker hurt by pressure on its
China business and from antitrust regulators. Tesla has
tumbled 29%, hit by worries about electric vehicle demand.
The Magnificent Seven were responsible for 40% of the S&P
500’s year-to-date gain as of late last week, according to S&P
Dow Jones Indices. That compares with a share of more than 60%
last year for the megacap group.
Other stocks have helped pick up the slack this year,
indicating the rally is broadening.
Tech and communication services –
sectors that house a combined five of the Magnificent Seven –
are among the top S&P 500 sectors so far this year. But energy
, financials and industrials are also
outperforming the S&P 500.
Recent performance is “providing early signs that investors
are beginning to look for opportunities outside Big Tech and in
anticipation of lower interest rates later this year,” Anthony
Saglimbene, chief market strategist at Ameriprise, said in a
market comment on Monday.
Investors have also been fixated on which companies stand to
benefit from increasing use of AI.
Nvidia has been the poster child for AI enthusiasm, but a
clutch of chipmakers and other tech stocks have also registered
massive gains, including Super Micro Computer and Arm
Holdings. In the latest sign of AI fervor, shares of
chip firm Astera Labs have more than doubled from its
initial public offering price a week ago.
(Reporting by Lewis Krauskopf; Editing by Megan Davies, Aurora
Ellis and Jamie Freed)