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The 2023 Financial Rollercoaster: Nasdaq’s Wild Ride

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The Good, the Bad, and the Bitcoin: A Look Back at 2023 Market Performance

As we approach the end of 2023, it’s time for a rollercoaster ride through the year’s market performance.

Let’s dive into the data with popular ETFs showcasing the 2023 returns across stock portfolios (blue), commodities (black), bonds (green), and, of course, Bitcoin (orange).

YTD Returns by asset class

At first glance, a few things stand out:

  • Equities Show Strength: The major equity indices rose between 9% to 45% YTD (first 3 bars), with Growth stocks (+24%) outperforming Value stocks (+15%). However, Mid-Cap (+10%) and Small Cap (+7%) lagged behind the Large Cap indices.
  • Communication and Tech Sectors Take Lead: These sectors soared with Communication Services, Consumer Discretionary, and Tech each witnessing a surge of at least 30%, fueled by consumer strength and AI optimism.
  • Gold Hits Record High: The safe-haven demand amid geopolitical tensions and a weakened dollar propelled gold to a record high of 11%.
  • Commodities Face Challenges: Energy prices, especially gas, fell due to new supply chains secured after the war in Ukraine. Similarly, agricultural commodities and industrial metals dropped by 15% and 5% respectively, affected by a slowing global economy and improved supply.
  • Long Bonds take a Hit: Higher interest rates resulted in long-term bond prices falling, while short-term Treasuries continued to promise high income distributions with relatively stable prices.
  • Bitcoin Breaks Records: Bitcoin rallied by 99% on speculations of an approved spot Bitcoin ETF, driving its price above $40k.

A Tale of Diverse Stock Performances

Despite high interest rates, the robust performance of the equity markets came as a surprise. A year ago, with recession fears looming, analysts had predicted a 1.7% fall for the S&P 500 this year. However, it defied expectations by soaring 19% YTD (chart below, orange line).

Yet, not all indexes or stocks shared the same fortune. The Dow Jones Industrial Average (grey line), except for Apple and Microsoft, witnessed a modest growth of less than 10%. In contrast, the growth-focused Nasdaq-100 displayed an impressive surge of 45% (blue line).

Equity indices

The Magnificent 7: Powering the Outperformance

The differing performance of these indices can be attributed to the influence of the (Nasdaq-listed) “Magnificent 7” – Apple, Amazon, Alphabet (Google), Nvidia, Meta, Microsoft, and Tesla. These companies, benefiting from the “AI trade,” witnessed a whopping 70% surge this year (blue line), in comparison to the meager 10% growth of the rest of the S&P 500 (orange line). Moreover, they hold a more substantial weight in the Nasdaq-100 than the S&P 500.

S&P 500 returns

Behind the Magnificent 7 Returns

Contrary to the tech bubble of 1999, the current surge is supported by the fundamentals. The magnificent Nasdaq 100 companies have shown significant earnings growth (red line) – much superior to smaller companies in the Russell 2000 (black line).

Nasdaq-100 EPS

In addition,

The Magnificent 7 Stocks Outshine All, But Will the Shine Last?

As highlighted recently by Goldman Sachs, the Magnificent 7 companies are reigning supreme in the stock market, with margins that soar above the rest of the S&P 500. These heavyweights are projected to not only maintain this lead but to widen the gap even further over the next few years. The market is well aware of this domination, which is reflected in the significantly higher price-earnings (PE) multiple of the Magnificent 7 compared to the rest of the S&P 500.

Margins

The substantial gap in PE multiples between the Magnificent 7 and the S&P 500 reflects the market’s confidence in the future earnings of these dominant companies. On the flip side, the rest of the S&P 500, along with small and mid-cap stocks, are currently trading at more modest PE ratios, with some even below their long-term averages.

S&P 500 ratios

2023: A Surprising Triumph for Stocks

Despite concerns about rising interest rates and sluggish economic growth, 2023 has defied expectations, emerging as a remarkably successful year for stocks. With the Federal Reserve anticipated to initiate rate cuts in 2024, stocks and bonds are poised to benefit from a favorable valuation environment. However, this rosy outlook hinges on several factors, including sustained relief from inflation, minimal spillover of geopolitical risks to energy markets, and a smooth deceleration in earnings growth.

Investors must proceed with caution, keeping in mind that the information provided here is for educational purposes only and should not be construed as investment advice. It is crucial to conduct thorough due diligence and evaluate companies carefully before making any investment decisions. Seeking guidance from a qualified securities professional is highly recommended.

So, will the Magnificent 7 maintain their dominance, or will unforeseen challenges cast a shadow over their triumphant reign in the stock market?

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