Tech outperforms the rest in first half: Nasdaq defies pullback

After being hammered in 2022, the US tech has rebounded sharply in the first half of 2023 with Nasdaq Composite up by more than 30%, thanks to the AI revolution started by Chat GPT which propelled Nvidia: the biggest beneficiary of AI trade above USD 1 trillion market capitalization. It should be noted that the gains are heavily concentrated towards top 7 tech giants: Apple (APPL), Tesla (TSLA), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Meta (META), and Amazon (AMZN). This exclusive group of 7 mega-cap companies currently accounts for 27.5% of the S&P 500 index’s total market capitalization. 

On the other hand, Dow Jones has underperformed both Nasdaq and S&P 500 with flat to 3% gains so far this year. This clearly indicates that the strength in US equity market in based out of rapid AI emergence only with rest of the sectors feeling the heat from restrictive monetary policy of the Fed, which is expected to last throughout the year end. The momentum of tech stocks is also having rub off effect on the beaten down US housing sector stocks which are also on the rise for the 6 months straight, despite sustained high level mortgage rates (6.81%).

As stated earlier, the Federal Reserve’s ongoing fight against inflation could result in a soft landing in 2023. With labor market still strong, there is more than 50% probability (a decent rise from just a couple of % few months earlier) that the Fed could slow the economy without inducing a recession. However, the same can not be extrapolated for 2024, without a downward revision of the federal funds rate.