The S&P 500 Index certainly did not wait until the Fourth of July to set off some fireworks. The benchmark for U.S. stocks bounced back from a tough 2022 with a nearly 16% first half of 2023 gain and its best start to a year since 2019 (and one of the best starts in history).1 As Katy Perry sang in her 2010 hit single ‘Firework’ – “You just gotta ignite the light, and let it shine; just own the night, like the Fourth of July.” Well the market’s light was re-ignited this year as promises of massive growth from new technologies (namely artificial intelligence) are usurping any concerns about persistent inflation, a regional banking crisis, an expected decline in corporate earnings, war in Ukraine or just about any other negative headline.
Much has been said about how narrow the stock market has been – and this is certainly true. The great majority of this 2023 gain can be attributed to a handful of stocks like Nvidia, Meta (Facebook), Tesla, Amazon, Netflix, Microsoft and Alphabet (Google).2 Further, the technology sector accounted for roughly 62% of the S&P 500’s first half 2023 returns and the Nasdaq 100 had its best first half ever with a 39% return.3,4 The good news is that from a historical perspective, strong first half equity returns usually sustain themselves through the second half of the year.
While no one wants to pour a bucket of water on the market’s spectacular fireworks show, the one thing to note is that the great majority of the market’s first half gain is due to valuation increases and not underlying earnings growth. According to Factset, corporate earnings are expected to decline for the second straight quarter and by roughly 6.8% in the coming second quarter results.5 So whether or not this market rally is sustainable will depend greatly on how corporations perform fundamentally and if they can beat low expectations like they did after the first quarter. The storm clouds from inflation have abated somewhat, so in the meantime, we will enjoy the fireworks. But it may not be a bad idea to keep an umbrella handy, just in case.
Happy Fourth of July!
1MarketWatch – Nasdaq books best first half since 1983; 6/30/23
2Yahoo! Finance – The stock market's gains are almost entirely concentrated in the 'Magnificent 7' - and that could mean a crash is coming; 6/30/23
3Bespoke Investment Group – The Bespoke Report Newsletter -- First Half Review -- 6/30/23; 6/30/23
4Fortune – Nasdaq had its best ever first-half of the year with a nearly 40% gain propelled by Big Tech and A.I. hype; 6/30/23
5FactSet – S&P 500 Earnings Growth; 6/30/23
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