AI Enthusiasm Propelling Nasdaq 100 to Its Strongest Performance Since 1999

As the curtains fall on a remarkable year for stocks, the Nasdaq 100 takes center stage in the financial landscape, showcasing significant gains in the realm of big tech. 

Fueled by the enthusiasm surrounding artificial intelligence (AI), the market hovers near all-time highs. The S&P 500 stands within a mere 0.5% of its record, while the Nasdaq 100 gears up for its most outstanding performance since 1999.

Analysts express optimism, especially if the stock market breaks through the record high in a significant way as January unfolds. The beginning of a new year often witnesses a robust market rally, amplifying momentum as investors adjust their investment strategies.

Amid a globally rates-obsessed environment, the stock market experienced a substantial reversal after enduring its worst annual selloff since 2008. Traders heightened their bets on the Federal Reserve, concluding its hiking campaign and initiating policy easing in 2024. This sentiment propelled global bonds to their most significant two-month gain on record.

The S&P 500, trading a few points below its all-time high of 4,783.35, extended its 2023 advance to 25%. Despite a weak $40 billion sale of seven-year notes causing Treasuries to drop, the dollar strengthened against most developed-market peers. The yen climbed as Bank of Japan Governor Kazuo Ueda prepared for the nation’s first rate increase since 2007.

The ‘Magnificent Seven’ and Market Caution

The seven-largest US tech stocks, including Nvidia Corp. and Microsoft Corp., contributed to almost 65% of the market rally, driven by the AI frenzy. 

The ‘Magnificent Seven,’ comprising Amazon.com Inc., Apple Inc., Google parent Alphabet Inc., Meta Platforms Inc., and Tesla Inc., are expected to achieve a substantial 22% earnings growth next year, double that of the S&P 500.

Michael Landsberg at Landsberg Bennett Private Wealth Management emphasizes the importance of a defined AI strategy, suggesting that companies with clear metrics will likely perform well in 2024. However, caution arises as valuations, though reduced from peak levels, remain elevated, with the Nasdaq 100 priced at about 25 times profits projected over the next 12 months.

Bespoke Investment Group notes a lower percentage of stocks outperforming the S&P 500, questioning the sustainability of market leadership. As the market sits on significant gains, there is a prevailing sentiment that participants are eager for the year to end to register these profits.

Caution Amid Overbought Signals and Economic Dynamics

Cautionary signals emerge as warnings of an overbought market raise concerns about a potential pullback. Some market observers argue that traders may have moved too rapidly in pricing in a dovish Federal Reserve pivot.

While the recent decrease in inflation is positive for the Fed, figures indicating economic resilience could fuel consumer spending, contradicting the central bank’s aim to slow growth. The drop in Treasury yields has relaxed financial conditions but poses risks for sustainably low inflation.

As the year-end approaches, financial markets show mixed movements, with stocks, currencies, cryptocurrencies, bonds, and commodities experiencing varying shifts in value.