Big tech stocks are surging. Here’s what that means for the rest of the market.
All three major indices are now up more than 20% from their bear market lows, leading some pundits to declare a new bull market is in the air. While “bull market” is as much a term of art as a hard investing concept, the stock market rally this year shouldn’t be ignored, especially the surge in recent weeks.
The chart below shows how all three indexes have performed this year.
DATA BY YCHARTS.
If you’re looking to read the tea leaves as to the market’s direction, there’s no better place to look than big tech companies. I’m talking about Apple (AAPL -0.59%), Microsoft (MSFT -1.66%), Alphabet (GOOG -1.38%) (GOOGL -1.25%), Amazon (AMZN -1.27%) Meta Platforms (META -0.29%), Nvidia (NVDA 0.09%), and Tesla (TSLA 1.81%).
Together, those companies represent roughly $10.5 trillion in market value and have outsize influence over the U.S. economy, representing a wide range of businesses, including computers and smartphones, software, digital advertising, semiconductors, e-commerce, cloud computing, social media, electric cars, artificial intelligence, and more.
As the chart below shows, all seven of these stocks have easily outpaced even the Nasdaq this year, and three of them have more than doubled in value this year, a remarkable feat for some of the biggest companies in the country.
DATA BY YCHARTS.
It’s worth paying attention to these companies not just because they make up such a large chunk of the stock market and the overall economy but because the tech sector is often a leading indicator for the economy and the stock market. Spending in areas like digital advertising, software, and cloud computing is often easy for companies to pull back, which means the stocks tend to dip before the broad market and recover earlier. And that seems to be reflected in the current market.
The tech recession is over
Not only are big tech stocks soaring this year, but the underlying business performance also seems to indicate that the worst is in the past for these companies. The wave of layoffs that hit many of the stocks above and smaller tech stocks from late 2022 to early 2023 seems to have passed. Even the brief banking crisis that hit tech-friendly banks like SVB Financial has been contained.
With the layoffs in the past, much of the sector is now leaner and should be more profitable, especially as they return to revenue growth.
First-quarter results also showed revenue growth for all of these companies, except Tesla, reaccelerating; in many cases, that reacceleration came after several quarters of slowing revenue growth as most of these companies experienced booms during the pandemic.
DATA BY YCHARTS. YOY = YEAR-OVER-YEAR.
Most of these companies only saw a modest rebound in revenue growth in the first quarter, but that doesn’t matter. The important thing is that the downturn has ended, and revenue growth is inflecting. As you can see from the chart below, analysts also expect sequential revenue growth at all of these companies, except Apple, in the current quarter.
DATA BY YCHARTS.
That’s another sign that the worst of the tech recession has passed, and the general bullishness around artificial intelligence also supports this resurgence.
What it means for investors
With all these stocks having jumped this year, they’re now trading at arguably stretched valuations. That’s a reflection of the market’s belief that their earnings will soon grow to reflect those higher valuations. Apple, for example, is already trading around all-time highs, as is Microsoft.
While there could be more gains to come from these big tech names, investors might have better luck looking to beaten-down stocks like Upstart, which has only started to recover; the ad tech sector, which has yet to get the same tailwind as Alphabet and Meta are getting; and even cyclical names like Carnival, as a new bull market is likely to be generous to the cruise sector.
Overall, the surge in tech stocks and the improving results in the first quarter show that, barring any unforeseen events, the bear market is over, no matter what your definition of a new bull market is.