With a gain of 3.3% over the past five trading sessions, the tech-heavy Nasdaq Composite Index booked its fifth straight week of gains. This marked the index’s longest weekly winning streak since November 2021, driven by Q4 earnings results from major tech heavyweights like Apple (AAPL), Amazon (AMZN) and Meta Platform (META). For the week, the Dow Jones Industrial Average added 1.8%, while the S&P 500 Index gained 2.5%.
On a year-to-date basis, the gains are even more pronounced. The Nasdaq has risen 15.5%, compared with a 2022 decline of 34%. The S&P 500 is up 8.16%, while the Dow has added a modest gain of 2.38%. The reasons for the year-to-date increases could be attributed to several factors. The market has broadly applauded the earnings results companies have reported thus far, having arrived “less bad” than feared, while the forward guidance have been encouraging, suggesting CEOs are feeling some level of confidence in their ability to navigate inflationary headwinds.
While it’s still early in the Q4 reporting cycle, it’s now worth asking whether we have entered a new bull market. To be sure, the strong surge in January jobs report was unexpected, and this could put a damper on whether the Federal Reserve will fully pivot from its rate hiking mode to a more subdued monetary stance. But even then, the Fed’s decision last week to hike rates by 25 basis points was an indication that the “pivot” might have already begun.
With inflation at multi-decade highs, the Fed did what it could to adhere to its mandates, raising interest rates seven times in 2022, including raising rates by 75-basis points four consecutive times. “Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” This was precisely what unfolded in 2022.
However, in the last three rate hikes, the increases have come down from 75 basis points, to 50, and now 25 basis points on February 1. While it’s not an immediate 180-degree turn, I would consider this trend a pivot, if not the start of one. Rising interest rates is what triggered the bear market in 2022. In the case of the Nasdaq, which is comprised of high-growth companies, rising interest rates pressured their businesses, forcing high growth names to borrow money at higher rates to fund their operations.
In the process, stocks got punished due to lack of liquidity, particularly high growth tech stocks. Meanwhile, inflation forced consumers to cut back on spending, and that spending is what high-growth companies rely on. This had negative effects on, for example, Tesla (TSLA) which suffered 70% declines in 2022. The luxury electric vehicle company, which missed the Street's Q4 delivery target, has had to reduce its prices on multiple occasions in order to spur sales. However, in 2023, Tesla’s price cuts in now seen as giving it a possible market share advantage.
In other words, nothing has changed, but the perception went from “bad” to “good.” It’s the same thing with last week’s tech earnings. With Q1 revenue falling 5% year over year, Apple missed the Street’s estimates for the first time in seven years. Amazon posted its weakest year for growth since it went public 25 years ago, Google parent Alphabet's (GOOG , GOOGL) core advertising business shrank. But here’s the thing: All three companies ended the week with strong stock gains.
All told, while it appears the market is waiting for the Fed pivot, the market itself has already pivoted from a bear mindset to bull mindset by ignoring what has typically been “bad news.” And that’s often a good sign that a new bull market is underway.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.