Despite the various pessimistic reports that are circulating at this time, it seems that investors are still relatively optimistic about the future trend of Nasdaq and S&P 500.
This is according to the Weekly Note of Geneva-based asset management firm NS Partners, by country manager Giacomo Calef.
It is worth noting that the S&P 500 also gives very significant weight to the tech sector, so it is no coincidence that it follows a trend in some ways similar to the Nasdaq.
Moreover, 81% of the 2023 performance of the S&P 500 index is due to the ten companies that are given the most weight within the index, and among them are Apple, Microsoft, Amazon, Alphabet (formerly Google), Nvidia, and Meta (formerly Facebook).
The curious optimism of investors about the Nasdaq and S&P 500 indexes
Concerns continue to persist in the US about triggering a possible recession by the end of the year, mainly due to particularly high interest rates.
Moreover, recent data on core PCE inflation are suggesting that rates could still be raised by another 25 basis points in June.
Yet the NS Partners Note argues that despite the uncertainty caused by the macroeconomic environment, the S&P 500 rose above the 4,200-point level in mid-May, which is a mark it has not crossed since August last year.
The assumption is that despite the risks, investors seem to remain optimistic about the future valuation of this index.
A similar argument can be made for the Nasdaq, which during 2023 recovered even better than the S&P 500. In fact, both have recently returned to the levels they had last year before the descent in the second half of May.
It is as if the pessimism stopped at the end of 2022, and 2023 began with some optimism instead.
The motivations behind the optimism
According to the NS Partners Note, the motivations behind this slight optimism could be many, starting with the fact that the US labor market has proven to be robust even despite the Fed‘s decidedly restrictive monetary policy.
The latest quarterly reports of many companies have also shown interesting data, such as earnings above expectations indicating a stable level of consumption.
But these generic data may also have been overly influenced by the performance of a few specific stocks. In fact, companies with larger market caps have a greater impact on index performance.
These include big tech, which have particularly high valuations: for example, Meta has a price-to-earnings ratio of 24.9.
So on the one hand are the majority of stocks in the S&P 500 that have had stable prices, or even negative performance in 2023, while on the other hand are the top 20 that have taken overall performance to +8.12% since the beginning of the year. The effect of big tech has been particularly significant precisely in 2023 thanks to quarters above expectations and the boom in artificial intelligence.
The correlation of the Nasdaq and S&P 500 with the dollar and gold
Over the medium term, the decline in the Dollar Index, which fell from 113 points in early November 2022 to 101 in early May, also stands out, although it has since returned above 104 points in recent weeks.
The price of gold, on the other hand, has paradoxically followed a trend in some ways similar to that of the Nasdaq and the S&P 500, and has risen from $1,630 an ounce in November to $2,050 in early May.
What is noticeable in 2023 is that the S&P 500 ended its rise in mid-April, which was then followed by a period of lateralization with volatility that until Friday seemed to still be ongoing.
Gold, on the other hand, ended its upward period in early May, and the dollar ended its downward period before mid-May.
The Nasdaq, on the other hand, has been rising for more than two months, although this has alternated with brief periods of decline.
The trend that had characterized the early months of 2023 seems to have ended before mid-May, although this does not seem to apply to that of the Nasdaq.
The NS Partners Note also devotes a paragraph to the Japanese situation.
In fact, investors and companies from G7 member countries are showing interest in the Land of the Rising Sun itself.
Indeed, Japan has several qualities that Western countries cannot ignore, such as being a safe place where technological knowledge can be transferred and at the same time being an ally of the United States.
Its GDP growth in the first quarter of the year was higher than expected, or 1.6%, thanks mainly to domestic consumption, as well as from tourism. Consumption increased by 3.67% in the first quarter, the highest quarterly growth rate in 30 years.
Inflation is at 3.2%, which is much lower than in the US or the Eurozone, thanks to the containment of energy prices.
In addition, wages are now rising after they have been stable for a long time.
Japan’s exports have grown by as much as 43% in the past two years, mainly due to tech products. In fact, it is Japan’s tech sector that offers the opportunities that attract investors the most.
In May the Nikkei 225 reached its highest level since 1990, and since the beginning of 2023 the index has risen 18.48%.
Due in part to the lack of geopolitical risks, the NS Partners Note points out that it will be interesting to watch how changes in the Japanese economy will affect foreign companies and investors.