29th January 2024

Weekly Index Movement

Aussie All Ords+1.7%

Last week saw the indexes close at new record all-time highs. The Dow Jones 30 exceeded 38,000 for the first time ever. This comes after a 2-year period without a new record high.

And stock market history suggests this break between records portends a better-than-average year ahead for the S&P 500.‌

In a note to clients on Monday, Keith Lerner, co-chief investment officer at Truist, noted that in 13 of the 14 prior instances, the index went at least a year between record highs the S&P 500 was higher 12 months later. The average gain over the ensuing 12 months? 14%, about 3 percentage points above the average annual return for the S&P 500.‌

Moreover, in nine of those 14 instances, the S&P 500 rose at least 10% over the next year. The widespread bullishness that overtook Wall Street strategists during 2023’s rally, then, appears to be on solid footing, historically speaking.

I wasn’t expecting a lot from the market this year. I thought we would pause for a year after such a good run last year. But maybe I am wrong. Conditions certainly are nearly perfect for further gains.

The economy is growing, as we saw from the +3.3% annualised GDP announcement last week, inflation is now under 3% and closing in on the Fed goal, employment remains strong, interest rates are coming down, earnings are going up and there is still plenty of money to come back in that left for money market funds last year.

In fact, I can’t think of something that could stop gains this year. It would have to be an unknown unknown surprise. And you can’t plan for that so why bother? Just get long and enjoy the ride.

The only way the indexes can put in a 10%+ year is if Tech does all the lifting, so just buy big tech. Boring? Yes. Profitable? Most likely. If you want excitement go to the casino. If you want easy profits, buy big tech.

This graph from Yahoo Finance is on topic

What they see is the valuation of Tech being at a record to the S&P500 and therefore raise the question of whether it is overvalued.

What I see is three decades of increasing outperformance of tech to the rest of the market. Of course it was going to make a new high eventually. But direction and momentum are far more important than absolute levels (true for stock prices too).

If tech has been outperforming for 3 decades, why would that suddenly change now?

When looking to invest money, where to invest it becomes somewhat of a game of comparisons. Should you invest in cash? Bonds? Tech? Banks? Health Care?…..

Well, here is a comparison for you. This is from FactSet. They did a clever analysis showing the contribution of Big Tech to S&P earnings in Q4 2023.

The difference between the Big 6 and everything else is stark. The forecast is for earnings of the big 6 to increase by 54% but for everything else to drop by 11%

Seeing as stock price movements can basically be explained by earnings changes, where do you think money will flow?

I can’t recall ever seeing such a glaringly obvious indicator of where I should put my money.

On the topic of Tech, AI is the theme du jour. I promised I would find some opportunities in AI but it is proving hard.

AI is so new that it isn’t yet clear who will benefit the most from it. Companies like Walmart are using it to improve the shopping experience. For example, on their new AI app, you can say something like “I’m having 4 friends over to watch the superbowl, order me food and drink” The AI then works out what is most popular or best for you, and places the order.

I like the new world that is coming to us. It will make life easier. Instead of browsing through websites looking for what we want, adding them to a shopping basket then paying on checkout, we can just get AI to do it all.

But this is where picking the winners gets hard. Winners will be companies that deploy clever use of the technology to improve their profit margins. Good AI will drive more sales. Good AI will reduce the need for employees. It will improve inventory management. But we don’t know which companies will be the ones to innovate the best use.

So, the best way to profit from it is to buy the enablers. These will be the chip manufacturers and large language owners like Microsoft (MSFT) and Google (GOOG).

At the moment NVidia (NVDA) makes the favoured chipset. But AMD (AMD) is releasing a chip that is touted to be more powerful. The NVidia chips sell for $25k-35k each and Nvidia cannot manufacture enough to keep up with demand.

Mark Zuckerberg (META CEO) said on Thursday that by the end of 2024, the company’s computing infrastructure will include 350,000 H100 (NVidia) graphics cards. That is just one company spending billions on these chips.

Another idea for you is Cadence Design Systems (CDNS). Cadence has software that helps the chip manufacturers design and develop new chips.

And of course, you have the world’s largest chip manufacturer – Taiwan Semiconductor (TSM). You can guarantee they won’t want to miss out on this trend. They will come to the party with something soon too.

Next Week

The big event of the week will be the Fed rate decision on Wednesday. He will announce no change, but his comments at the press conference will be key. The market is pricing in a 46% chance of a cut at the next meeting in March and is fairly sure of two by July.

Does Powell let them believe this or poor water on it?

I tend to think he will perpetuate the story. It is much better for confidence that we get a series of 25bps cuts than panic 50bps cuts. That would indicate a problem. I suspect he will cut 25bps consistently on a schedule of something like every second meeting to show inflation is under control and the economy is not collapsing.

Apart from that, earnings season continues.

Earnings from five of the”Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) — will highlight a packed week of quarterly reports. In all, 106 S&P 500 companies including six Dow components are slated to report in the week ahead.

Buckle in, next week is set to be exciting.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.