The Nasdaq 100 index has soared to new heights, thanks to the stellar performance of Microsoft and other big tech stocks. The software giant has closed at a record high on Wednesday, leading a rally that has added about $1.5 trillion in market value to the tech-heavy gauge in recent days. This suggests that the market’s confidence in the sector’s growth potential and resilience has been restored.
Microsoft: A Leader in AI and Cloud
Microsoft has been the top performer among the seven megacaps that have powered the market’s gain this year. The stock has gained around 15% since the end of September, making it the most valuable public company with a market capitalization of $2.69 trillion, not far from Apple’s $2.85 trillion.
The stock’s advance follows Microsoft’s impressive results, which showed a rebound in cloud growth amid demand for artificial intelligence products. The company reported a 22% increase in revenue and a 48% increase in earnings per share for the first quarter of fiscal 2023, beating analysts’ expectations. Its cloud computing segment, Azure, grew by 50%, while its AI segment, Cognitive Services, grew by 45%.
Microsoft has been widely praised for its execution and innovation in the AI and cloud domains, which are expected to drive the future of technology. The company has also been investing heavily in these areas, acquiring AI startups such as Nuance Communications and Activeloop, and launching new products such as Azure Synapse Analytics and Azure Percept.
“Microsoft checks the most boxes, and checks them the most emphatically,” said Jonathan Cofsky, portfolio manager at Janus Henderson Investors. “It has a resilient business model, it is executing extremely well, it is a clear winner in AI, and overall it has the most secular tailwinds and fewer secular risks than other companies.”
Big Tech: A Safe Haven in Turbulent Times
Microsoft is not the only big tech stock that has been rallying lately. Alphabet, Apple, Nvidia, Meta Platforms, and Tesla have also posted strong gains in March, helping the Nasdaq 100 index rise by 6.2% this month. The index is now up 19.7% from its December closing low, near the 20% threshold that represents a new bull market. A 17% year-to-date gain compares with one of 3.4% for the S&P 500.
The rotation back toward big tech, a partial reversal of widespread weakness throughout 2022, has been fueled by their so-called safe haven status as fears of contagion in the banking industry pushed investors toward megacaps’ cash-rich balance sheets and durable revenue streams. The collapse of Silicon Valley Bank in February led to a crisis in the financial sector, triggering a sell-off in bank stocks and a flight to quality in tech stocks.
Another factor that has boosted tech valuations is the decline in Treasury yields, which have fallen from a peak above 4% earlier this month to around 3.5%. Lower yields are beneficial to tech stocks since they enhance the present value of future earnings, but the drop may not be sustainable, especially if it seems like the worst has passed for banks and as the Federal Reserve expects to continue raising rates to fight inflation.
Tech Stocks: A Bright Outlook for 2023
Despite the risks of rising interest rates and valuation concerns, tech stocks’ massive run of gains will continue, according to some analysts. They argue that the sector’s fundamentals are strong, and that the emergence of AI will lead to a new wave of growth and innovation.
Wedbush’s Dan Ives, for instance, named buying tech his top idea for the end of the year, and predicted that the rise of AI will lead to $800 billion of extra spending this year. He compared the emergence of the tech to the rise of the Internet in 1995, and said that the rally will broaden beyond seven or eight big names.
Oppenheimer and Truist Advisory Services also upgraded the sector this week, citing its strong balance sheets, cash flow generation, and earnings. They said that tech stocks will continue to outperform the broader market, and that investors should take advantage of any dips to buy more.
“We don’t love tech, but while other options don’t look great either, tech has gotten so crowded that we could see a real reversal if emotions change,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “But we think tech is still the best place to be for the long term.”
