We have seen inflation decline down to 4%, as reported in June 2023. At the same time, we’ve seen the equity markets improve with the S&P 500 Index returning almost 16% and the MSCI EAFE (international) Index returning 11.67% (year to date as of 6/30/2023). This recovery is feeling very sneaky. Most investors are surprised the market is doing that well and questioning, ‘what happens next?’.
What’s up, MAAAN?
After peaking at nearly 9% last summer, inflation is now in a comparative freefall. The consumer price index rose just 3% year-over-year in June, according to government data. That’s good news as it marks the lowest inflation rate since March 2021, back when rising prices were hardly a pressing issue and stocks were roaring ahead. So far this year, the Nasdaq composite (technology) is up a whopping 32% (6/30/2023). While the S&P 500 sits just 7% away from a new all-time high. Some experts consider reaching this milestone as the official marking point of a new bull market.
What’s responsible for the upswing? A sort of new-fangled FAANG group at the top of the S&P 500 that we’ll call “MAAAN” — that’s Microsoft, Apple, Amazon, Google-parent Alphabet, and white-hot chipmaker, Nvidia. Interestingly, Meta (aka Facebook), with its sub-trillion-dollar market cap, is no longer in the big boy’s club. The group, and the AI mania they’re stoking, are almost exclusively responsible for the broader market’s rise:
- Profits across the MAAAN companies are projected to rise 16% in the quarter that ended on June 30, 2023 before accelerating in the last two quarters of the year, according to a recent Bloomberg analysis report. Meanwhile, profits for all other companies in the index are projected to fall by about 9% on average.
- The rise of artificial intelligence is fueling the feeding frenzy. A report by Blackrock reports that the driver of market performance and earnings this year is the artificial intelligence (AI) buzz.
Bubble Babble
Recent history tells us that hot bull market runs can quickly be followed by a protracted bear market hibernation. The tech industry’s 2021 success quickly crashed and burned in 2022 in the face of the Fed’s interest rate-hiking campaign — causing Wall Street to rethink its growth-vs-profit mindset and triggering many investors’ PTSD from the late 1990s dot-com bubble.
Is this year different? Maybe. Today, companies are NOT trading at 150 times peak earnings and valuations have come down from previous heights.
Are we out of the woods yet? It’s too soon to tell but it looks like we are on the right path!