Jim Smigiel, chief investment officer at SEI Investments Company, called the current trend a "junk rally," in which the weakest quality equities do the best.
Technology companies have surged in the riskiest parts of the market this year, and critics are now predicting a quick turnaround.
The 'Junk Rally'
The Nasdaq 100 Index has soared 16%. According to Bloomberg, this is due to the success of unprofitable software developers, cryptocurrency companies, meme stocks, electric car manufacturers, and anything remotely connected to artificial intelligence (AI).
In contrast to late 2022, bond rates have fallen from their recent highs as inflationary fears have subsided, supporting the bull thesis that current financial circumstances are far more favorable.
A basket of losing technology equities managed by Goldman Sachs Group gained 27%. Lucid Group, a producer of electric vehicles (EV), has had the greatest increase in value among the components of the Nasdaq 100, at 69%. Two AI companies, C3.ai and SoundHound AI, have more than doubled, while BuzzFeed has increased by 161% due to plans to adapt AI in content development.
The most shorted tenth of S&P 500 stocks outperformed the least shorted by 14% points in 2023, according to Bank of America. The broker found it odd that businesses whose profits missed projections outperformed the S&P in the five days after the report.
Smigiel called this activity a "junk rally" when the lowest-quality companies do best.
Citigroup reports that pessimistic bets on the Nasdaq 100 are increasing, lending credence to this viewpoint. Even if market interest rates have declined, monetary conditions remain tighter, and experts are worried about a recession.
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Rebound Firms
The Federal Reserve raised interest rates this week by a lower amount than in prior increases. Chair Jerome Powell, however, has signaled that the central bank intends to deliver a few more hikes before suspending its drive to battle inflation. Some investors expect the Fed to reduce rates later this year, but if this week's red-hot payroll data is any indication, tech's 2023 rise may be at risk.
Irene Tunkel, BCA Research's chief strategist of US equity strategy, stated, "We are in a narrow window where fears about inflation are subsiding, but we haven't yet given our attention to slowing growth...Unprofitable and other risky companies are the prime candidates to rebound in this window, [but not sustainable]."
Meanwhile, the underlying picture has remained very hazy. Microsoft, Apple, Amazon, and Alphabet announced mixed to dismal results. Bloomberg data shows that just 50% of S&P 500 tech firms have surpassed sales projections, down from 59% last quarter.
Microsoft will join Apple as one of two firms worth over $2 trillion if the premarket gains persist on Wednesday, Feb. 8.
After launching a ChatGPT-powered Bing search engine on Tuesday, Feb. 7, Microsoft's market worth rose to $1.99 trillion. Shares rose 12% this year.
