The year 2023 has been a remarkable one for Big Tech, with tech stocks poised to have yet another strong week. However, despite the impressive rally, the Nasdaq Composite still hasn't reached its record high from 2021.
As of Friday, the Nasdaq Composite was on track to achieve a 35% increase for the year 2023. November alone has seen a 9.8% climb in the tech-heavy index.
Several companies have played a significant role in propelling the Nasdaq to its current level, some even exceeding expectations. The Magnificent Seven big tech stocks, including Apple (AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), have all experienced gains of 50% or more since the beginning of the year.
Despite these impressive gains, the Nasdaq is still approximately 12% below its record close of 16,057.44 on November 19, 2021 – exactly two years ago this Sunday. Another double-digit percentage increase is required for the Nasdaq to surpass that level.
However, certain stocks have already surpassed their previous record highs. Microsoft closed at a record high on Thursday, and Nvidia achieved a new record earlier in the week.
Nevertheless, it appears challenging for the tech sector to continue its upward momentum, considering the impact of elevated interest rates. When the Nasdaq reached its previous record high, benchmark interest rates were slightly above zero. Today, the Fed funds effective rate stands at 5.33%, and the yield on the 10-year Treasury is approximately 4.4%.
These higher interest rates pose as a hurdle for stocks in general, as many investors are now opting for government debt to secure virtually risk-free returns instead of investing in equities. However, this situation is especially troublesome for tech firms since the current high yields diminish the value of future earnings that investors covet.
Torsten Sløk, chief economist at Apollo Global Management, highlighted this conflict last month, stating that high rates and tech gains cannot coexist. He emphasized that "tech valuations are very high and inconsistent with the significant rise in long-term interest rates...In short, something has to give."
Further exacerbating the situation is the turbulent geopolitical backdrop that adds additional uncertainty to the tech sector's performance.
The Resilience of the Tech Industry in the Face of Doubts
As the year comes to a close, it is evident that the tech industry has not been deterred by skeptics. Despite the elusive nature of quantifying artificial intelligence's long-term revenue potential, recent earnings reports from key players suggest that the industry's foundations are solid.
Wedbush analyst Daniel Ives predicts that the positive trend in tech earnings will continue into the next year. He expects a minimum 20% increase in spending on AI and cloud applications as technology continues to play a central role in various corporate and consumer sectors.
Reflecting on historical patterns, DataTrek Research co-founder Jessica Rabe points out the correlation between January rallies and subsequent strong market performance. Barring major shocks, such as the events of Black Monday in 1987 or the 2001 terrorist attacks, years that commence with January rallies tend to yield double-digit annual percentage returns for the Nasdaq.
Regarding concerns about the rapid recovery of the tech sector from its 2022 lows, Rabe reassures that the Nasdaq index does not appear excessively overheated. While a doubling in value within a year would typically indicate a potentially dangerous and unsustainable bubble-like rally, the current rebound is still modest compared to such benchmarks. Rabe further emphasizes that a hypothetical "gen AI" tech bubble, if it were to occur, is still a distant possibility, considering the Nasdaq has much ground to cover before reaching such heights.
In this context, it may actually be advantageous for the index to take its time in reclaiming its 2021 highs. A gradual and steady ascent often leads to more sustainable long-term success.
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