The third quarter of 2023 concluded on a surprisingly positive note for U.S. markets, challenging the conventional wisdom that September is typically a challenging month for stocks. This quarter saw the S&P 500 and Nasdaq achieving their best performance since 2020, while the Russell 2000 marked its most impressive third quarter since 2009. The Dow Jones Industrial Average even closed at an all-time high, bolstered by the Federal Reserve’s initiation of a rate-cutting cycle.
Throughout the last three months, the S&P 500 climbed nearly 8%, driven predominantly by significant gains in the Technology and Consumer Discretionary sectors. This rally reflects robust investor confidence in the economy’s resilience, although there are emerging concerns related to potential government shutdowns. Despite these uncertainties, Wall Street remains largely optimistic that such disruptions will not derail the market’s upward trajectory.
Omar Aguilar, CEO and Chief Investment Officer at Schwab Asset Management, noted that investors would be best served by maintaining the status quo, as any market fluctuations would largely depend on the duration of the shutdown and its effects on Federal Reserve data visibility. He emphasized that once these issues are resolved, market conditions are expected to stabilize.
Notably, the recent market dynamics demonstrate a shift, as the current tech boom elevates valuations to levels reminiscent of the dot-com era. Standout performers among companies outside of the major tech giants included AppLovin, Robinhood, Western Digital, and Seagate, all of which illustrate the expanding enthusiasm for AI technologies.
The tech heavyweights have maintained their momentum, with Nvidia posting nearly a 20% gain over the past quarter. Intel, which had seen previously lackluster performance, surged approximately 50%, while Oracle’s shares soared over 30% following a significant cloud-compute contract with OpenAI, the parent company of ChatGPT.
Investment insights from Kevin Mahn, Chief Investment Officer at Hennion & Walsh, characterized the current state of the market as being in “batting practice” for the AI revolution, suggesting that the foundational work being done now will pave the way for transformative changes in the economy and society, though the substantial returns on investment are expected to materialize in the years ahead.
Data from DataTrek Research indicates that the ten largest tech and tech-adjacent companies now account for almost 39% of the S&P 500, a notable increase from earlier in the year. This concentration in tech comes at a premium, with these leading companies trading at an average of 36.5 times forward earnings, compared to 24.8 for the broader index. This disparity does not seem to deter investors, as earnings for these tech giants are projected to grow nearly 19% next year—significantly outpacing the anticipated growth for the overall S&P 500.
Sector performance mirrored these trends, with the Technology sector leading the charge, gaining more than 11% in the quarter. Consumer Discretionary followed closely, while Consumer Staples emerged as a notable laggard, declining over 3%. Companies focused on essential products, such as Coca-Cola, Costco, and Colgate-Palmolive, saw their shares dip as investors shifted their attention back to growth-oriented stocks. This shift marks a stark contrast to earlier in the year when investors sought refuge in more defensive equities amid tariff-related concerns.
