During the first quarter of 2023, large capitalization growth stocks, such as Alphabet, Amazon, Apple, Meta (previously known as Facebook) and Microsoft outperformed the market. These five stocks returned 33 percent on an equal-weighted basis from January through March, while the S&P 500® returned 7 percent.
There are a few reasons why these companies led the market during the first quarter, some of which are short term, while others are likely to continue to be drivers of performance.
As pressures from core inflation began to recede in the U.S., the Federal Reserve (the Fed) slowed its pace of rate hikes. Additionally, the failure of Silicon Valley Bank and broader pressure on banks caused the market to conclude the Fed would likely reverse its interest rate hikes. Quantitative tightening also slowed as the Fed supported the banking sector. The Fed’s balance sheet jumped from $8.3 trillion to $8.7 trillion within days following the FDIC providing a backstop to depositors. This drove the money supply up, placing downward pressure on interest rates, as illustrated in the graph below.
Source: U.S. Treasury Department
The drop in rates was supportive of growth companies, which derive a large proportion of their value from future cash flows, as lower rates make the opportunity cost of waiting for future cash flows more valuable.
With respect to fundamentals, mega-cap growth companies generate large amounts of free cash flow, and have built up large cash reserves, with Alphabet, Amazon, Apple Meta and Microsoft, holding five of the six largest pools of cash on hand in the S&P 500® (outside of the banking sector).
The next graph shows the cash on hand of several notable growth companies compared to the average of the 100 non-financial companies with the most cash and cash equivalents, excluding the five companies listed below.
The S&P 500® index is a product of S&P Dow Jones Indices, LLC and/or its affiliates (collectively, “S&P Dow Jones”) and has been licensed for use by Segal Marco Advisors. ©2023 S&P Dow Jones Indices, LLC a division of S&P Global Inc. and/or its affiliates. All rights reserved. Please see www.spdji.com for additional information about trademarks and limitations of liability.
In addition to these companies’ large streams of recurring revenue, high cash balances provide some safety during difficult economic periods.
As a result, similar to the initial months of the COVID-19 pandemic, investors have looked to these companies as the yield curve has inverted, credit conditions have tightened due to stress in the banking sector and with further rate hikes which continue to raise the possibility of an economic recession.
From a technical perspective, the January effect has been particularly strong among these companies. The January effect suggests that companies that are the most oversold in December (due to tax-loss harvesting) rebound strongest in January as investors buy back in.
|Company||December Stock Performance||January Stock Performance|
The S&P 500® Index is a product of S&P Dow Jones Indices, LLC and/or its affiliates (collectively, “S&P Dow Jones”) and has been licensed for use by Segal Marco Advisors. ©2023 S&P Dow Jones Indices, LLC a division of S&P Global Inc. and/or its affiliates. All rights reserved. Please see www.spdji.com for additional information about trademarks and limitations of liability.
Outside of the mega-cap growth stocks, growing interest in artificial intelligence following the release of Chat GPT 3.0 benefitted semiconductor companies, like, AMD, Broadcom and Nvidia, with the PHLX Semiconductor Index up 28 percent year to date through March 31. This, coupled with poor performance in financials weighing on value indices caused a large disparity in relative performance between growth and value during the quarter.
The question is “will this trend continue?” After several years of growth dominance, 2022 was the first year of value outperforming growth. Now, while the portion of the 2023 reversal brought on by the Fed’s sudden balance sheet expansion is a moment-in-time occurrence, some macro effects could continue to support the trend in longer-duration growth stocks. Additionally, the cash reserves built up by the largest growth companies are positives to which investors may continue to gravitate amidst increased uncertainty and possible recession fears.
Nevertheless, in an uncertain market environment, it seems prudent to continue with both growth and value exposures in a portfolio.
The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.
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