The benchmark index’s H1 rally has been driven by a combination of factors, chief among them being a blistering advance in growth stocks led by technology. Positive sentiment was also buoyed by signs that the Federal Reserve’s aggressive rate-hiking campaign was having its intended slowdown effect on the economy, with market participants ratcheting up their bets that the central bank would have to end its monetary policy tightening this year.
“By far the biggest driver for the strong first half gains is the tremendous performance of growth sectors, helped by the artificial intelligence (AI) buzz and improved earnings trend. There are only three sectors outpacing the S&P 500 (SP500) and all are growth or quasi growth sectors,” Keith Lerner, co-chief investment officer at Truist, told Seeking Alpha.
“Technology is up 42%, Communications Services is up 36% and Consumer Discretionary (which holds Amazon (AMZN) and Tesla (TSLA)) is up 32%. Combined these three sectors account for 47% of the overall market weighting; so how they perform matters,” Lerner added.
The massive runup in technology stocks this year has grabbed headlines. After being shunned for the most part in 2022, investors piled back into high profile names such as the FAANG companies. Moreover, the craze around AI has played a major part, with heavyweight firms such as Microsoft (MSFT) and NVIDIA (NVDA) scaling new heights.
The tech-heavy Nasdaq Composite (COMP.IND) has soared 31.73% in H1, its best first half performance since 1983. The Nasdaq 100 (NDX), which comprises only the top technology stocks, has logged an even more impressive 38.75% rise in H1, its best first half showing on record.
“Apple’s (AAPL) 7.63% weighting and $3T milestone along with AI lifting Microsoft (MSFT) and its 6.78% weighting are one of the main drivers behind the S&P 500’s (SP500) rise in H1,” Chris Lau, investing group leader of DIY Value Investing, told Seeking Alpha.
The S&P 500’s (SP500) H1 performance this year is in stark contrast to the same time period last year. Back in 2022, the benchmark gauge posted its worst first half performance in 52 years, and eventually closed out the year with an approximately 20% decline, its biggest annual fall since the financial crisis in 2008.
“Coming into (2023), a key theme of ours was to keep an open mind. We have believed and continue to see that the traditional playbook is challenged in this post-pandemic world, where the crosscurrents remain extreme,” Truist’s Keith Lerner said.
“From excess consumer savings, which are still buffering the consumer, to the switch from goods to services, to the unemployment rate still hovering around a 50-year low despite the most aggressive Fed rate hiking cycle in decades, to the unlikely recent strength evident in the housing market, despite mortgage rates crossing back above 7%, the environment appears unusual,” Lerner added.
Looking Ahead to H2
Seeking Alpha contributor Damir Tokic believes that investors should gear up for a so-called “hard landing,” as the lagged effects of the Fed’s aggressive monetary policy tightening should start showing up more clearly in the remainder of the year.
“However, the growth is likely to contract while the core inflation likely remains elevated and sticky, which could force the Fed to remain restrictive, despite the growth contraction,” Tokic said on Thursday, adding that “this is consistent with the hard landing scenario, and the resumption of the bear market in the S&P 500 (SP500).”
DIY Value Investing’s Chris Lau also had some words of caution: “The market ignores persistently high inflation and the Fed ramping up rates. Despite another 50 bps added for H2, markets are fighting the Fed. This works until it does not. Should sentiment reverse, it will happen abruptly and without warning.”
“Summer is an unlikely period for any sell-off. Expect fear returning in the autumn, when realistic issues like commercial real estate and a severe slowdown in consumer demand hurt markets thanks to higher interest rates,” Lau added.
Fed chair Jerome Powell has continued to signal that further rate hikes are likely, and the central bank’s latest dot plot showed that policymakers are expecting two more rate increases this year. However, according to the CME FedWatch tool, markets don’t appear to believe the Fed, and are pricing in only one more hike.
Sector Performance in H1
As expected, growth areas topped the S&P sectors leaderboard in the first half of the year. Technology led the way with a whopping ~42% advance, followed by a ~36% jump in Communication Services and a ~32% rise in Consumer Discretionary. Of the 11 S&P sectors, five ended H1 in the red, with Energy and Utilities falling more than 7% each.
See below a breakdown of the performance of the sectors as well as their accompanying SPDR Select Sector ETFs from December 30, 2022 close to June 30, 2023 close:
#1: Information Technology +42.06%, and the Technology Select Sector SPDR ETF (XLK) +39.71%.
#2: Communication Services +35.58%, and the Communication Services Select Sector SPDR Fund (XLC) +35.61%.
#3: Consumer Discretionary +32.33%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) +31.47%.
#4: Industrials +9.22%, and the Industrial Select Sector SPDR ETF (XLI) +9.34%.
#5: Materials +6.61%, and the Materials Select Sector SPDR ETF (XLB) +6.68%.
#6: Real Estate +1.85%, and the Real Estate Select Sector SPDR ETF (XLRE) +2.06%.
#7: Consumer Staples -0.04%, and the Consumer Staples Select Sector SPDR ETF (XLP) -0.51%.
#8: Financials -1.51%, and the Financial Select Sector SPDR ETF (XLF) -1.43%.
#9: Health Care -2.33%, and the Health Care Select Sector SPDR ETF (XLV) -2.30%.
#10: Utilities -7.16%, and the Utilities Select Sector SPDR ETF (XLU) -7.18%.
#11: Energy -7.26%, and the Energy Select Sector SPDR ETF (XLE) -7.20%.
Below is a chart of the 11 sectors’ YTD performance and how they fared against the S&P 500 (SP500). For investors looking into the future of what’s happening, take a look at the Seeking Alpha Catalyst Watch to see next week’s breakdown of actionable events that stand out.
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