Last week marked the end of an eventful first quarter of 2023. Even after two regional bank failures and the rescue of a global investment bank, the S&P 500 Index finished the quarter up 7.03%. On a sector basis, technology was the biggest outperformer as it ended the quarter up 21.49%. This sector includes massive technology companies that are doing almost all of the heavy lifting in regard to the positive gains for the S&P 500 Index. In particular, AAPL, MSFT, NVDA, TSLA, META, AMZN and GOOGL accounted for 88% of the 7.03% gain in the index. A drawback of this index is that it gives higher weights to companies with more market capitalization. Thus, the performance of a capitalization-weighted index often comes down to the performance of a few companies. The first quarter provided a perfect example of this, as a handful of big tech rallies swayed the direction of the S&P 500 Index. The tech-heavy Nasdaq Composite, which finished the quarter up 17.67%, demonstrated this trend as well.
This week’s chart emphasizes how this rally has been entirely driven by big tech companies. The spread between the Nasdaq 100 Index and the Nasdaq Composite is the widest in history. The Nasdaq 100 Index (the 100 largest companies by market capitalization that are listed on the Nasdaq stock exchange) has outperformed and outpaced the broader Nasdaq Composite by roughly 960 points. The extreme influence of big tech helps explain why the index was up despite a banking crisis, higher interest rates and widespread uncertainty about what lies ahead.
Drilling down into the technology sector’s strength, these gains have been driven solely by multiple expansion. Tech forward price-to-earnings is +25% year-to-date, while tech’s 2023 earnings-per-share growth forecast has been cut from -2% to -8% year-over-year.
It will be interesting to see how long this tech rally lasts, as it was a technical shift and would need to be supported at some point by positive fundamental news in order to be sustained. This has been a notable reversal after a tough 2022 for tech stocks, as investors previously sought out less-risky investments amid the Federal Reserve’s interest-rate-hike campaign.
The first quarter highlighted how significant an impact a few big tech companies can have on an index. Their dominance year-to-date has the ability to overshadow other industries and potentially mask weakness underneath.
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