RIP 2023 Market Rally?

Was that it?

RIP 2023 Market Rally?

Was that it?

It’s been a helluva run this year. Most prognosticators were negative on the 1H of 2023 (which proved to be very wrong) and positive on the 2H which now seems to be consensus. Rates kept climbing and the economy did not collapse. The relative attractiveness of bonds (5% T-bills) versus stocks (P/E 19-20x) has seemed compelling during the entire stock market rally. But, there is no denying this 2Q EPS season has been different. Before we discuss what’s changed, let’s briefly review the market dynamic of 2023 and remind ourselves that stocks collapsed in the 4th quarter of 2022. The QQQ peaked on August 12th 2022 at $330 and fell 20% to $266 by the last trading day of 2022.

There is no doubt there were reasons to sell in the final quarter of 2022, but most important is that sentiment drove all of the longs out of the proverbial boat, hence by 2023 there was no one left to sell. Expectations were severely depressed with top down EPS calls from strategists claiming to foresee declines of 10% or so lay ahead. The March market-to-market (HTM wake up call) banking debacle kept skepticism alive and well and drove a flight to megacap tech which is made of highly cash generative companies with moats that could endure even a banking crisis. At first, this seemed like an extreme narrowness of the markets which was not sustainable UNTIL artificial intelligence (AI) took center stage as more than a cool theme with the May 24th massive surprise that NVIDIA saw growth from $7 billion in revenues to more than $11 billion in their next quarter. This was truly the largest sequential jump (in % terms and absolute dollars) by a company any of us has seen in our careers including the Y2K. Nvidia’s EPS power doubled overnight and suddenly the stock didn’t look quite as overvalued.