Is Big Tech Behind the Apparent Bull Market Rally?
By Daniela Hathorn
Date: 8 February 2024
Overview
The article discusses the recent rally in equity markets, particularly focusing on the influence of major technology companies, referred to as the "Magnificent Seven." While these tech stocks have significantly contributed to the momentum of the S&P 500 and US Tech 100 indices reaching new all-time highs, the author argues that they are not the only factors driving the market's bullish trend.
Market Dynamics
The author highlights that the equally weighted S&P 500 index has also achieved new highs, indicating that the bullish sentiment is widespread across the market, not just concentrated in big tech. This broader market strength suggests a more robust rally than what might be inferred from the performance of large-cap tech stocks alone.
Concerns About Valuations
Despite the positive market performance, there are concerns regarding whether this constitutes a true bull market. The current market conditions are reminiscent of the pre-financial crisis era of 2007, where excessive valuations were prevalent. Economists and major banks express caution about future growth, with recession risks still looming for 2024, despite signs of a soft landing.
Interest Rates and Market Sentiment
The article notes that the beginning of the year saw stocks struggling as the market adjusted expectations for interest rate cuts following the December FOMC meeting. The recent less dovish stance from the Federal Reserve has impacted market sentiment, yet stocks have shown resilience, quickly reversing bearish trends as risk appetite remains strong.
Correlation Between Stocks and Bonds
There is an unusual correlation between stocks and bonds, which is expected to revert. Elevated bond yields are currently more attractive than stock earnings yields, leading to concerns that stock valuations may need to adjust downward unless bond yields decrease significantly.
Data Impact on Markets
The article discusses the uncertainty surrounding how economic data will influence markets. Strong economic data could bolster stock prices by indicating economic resilience but may also lead the Federal Reserve to maintain tight monetary policy. The current environment is markedly different from January 2022, with higher interest rates and slower inflation and growth.
European Market Context
In Europe, inflation remains high while growth is stagnant. Central banks are hesitant to cut rates due to inflation concerns, which may pose risks for European stocks. Although European equities have underperformed compared to US stocks recently, the bullish sentiment from the US market is affecting European valuations, which could be vulnerable if market conditions shift.