At the beginning of 2024, large technology stocks continued to strengthen after a brief adjustment. As of January 9th, Nvidia hit a new historical high for two consecutive days, driving the Nasdaq up.
The large technology stocks known as the "Magnificent Seven" by Wall Street have become an important driving force for the rise of the US stock market in 2023- Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta saw an average annual increase of 105%, while Nvidia and Facebook led all Nasdaq 100 constituent stocks with gains of 239% and 194%, respectively.
Source: Wind, 2023.1.1-2023.12.31
In 2024, as the Federal Reserve's monetary policy enters a major turning point, can the significantly rising "Big Seven" continue to lead the way? What kind of market environment will small and medium-sized technology stocks that lag behind giants face next year? How should technology stocks be invested?
Fundamentals+buybacks support a significant increase in tech giants
From a fundamental perspective, the higher market value proportion of technology leaders in the US stock market is not a "tree without roots". From an industry perspective, technology industries such as information technology and communication services have benefited the most from the rapid development of the AI ecosystem. Although market expectations are already at a high level, the performance of these two sectors in the third quarter of 2023 financial reports still exceeded expectations, with companies accounting for 89.2% and 85.7% respectively. This indicates that there is still actual performance realization as support under high expectations.
Source: Bank of Communications International
From the perspective of technology leaders, the growth rate of performance has significantly increased. CICC analysis pointed out that on the one hand, leading technology companies have reduced costs and increased profitability through layoffs and other means, and sales and management expenses have continued to decline since the fourth quarter of 2022. On the other hand, the AI application boom has also boosted the revenue and profitability of companies in related fields. Technology leaders (Meta, Apple, Amazon, Microsoft, Nvidia, Google) have seen a significant increase in year-on-year profit growth for three consecutive quarters, from -32.1% in the fourth quarter of 2022 to 11.7% in the third quarter of 2023.
Source: China International Capital Corporation
By the third quarter of 2023, the proportion of revenue, operating cash flow and net profit of technology leading stocks in the non-financial sector of the S&P 500 had risen to 11.5%, 21% and 23% respectively, significantly higher than the level before the technology foam in 2000. Therefore, China International Capital Corporation (CICC) believes that due to the low growth pressure in the United States and the rolling slowdown, NASDAQ released the downward pressure on profits one year ahead of schedule in 2022. Coupled with the Federal Reserve's loose hedging measures, it is not concerned about the deep adjustment pressure on the US stock market.
Source: China International Capital Corporation
On the other hand, the long-term repurchase system also allows some top technology companies to maintain long-term strength in their stock prices even without high growth.
Taking Apple as an example, before 2012, Apple had hardly ever conducted stock repurchases. 2013 was a turning point, and then the repurchase amount began to soar significantly.
If we only look at the growth rate of net profit, Apple's fiscal year 2012 was $41.7 billion, and fiscal year 2023 was $97 billion. During this period, the annualized compound growth rate of net profit was 8%, which is not high for high-tech companies. But through a large number of stock repurchases, Apple's ROE increased from around 30% in 2013 to 172% in 2023. In the fiscal years 2021 and 2022, Apple's repurchase of common stock amounted to $86 billion and $89.4 billion, respectively, almost equivalent to the net profit for that year.
Source: Huafu Securities
A study has found that repurchase has a significant impact on improving stock price returns. Especially since the rapid development of stock repurchases in 1970, the dividend income generated by US stocks was 3.03% until 2014. After considering corporate repurchases, this part of the income increased to 4.26%, and the actual yield of US stocks during the same period was 6.25%.
Source: Huafu Securities
Is there only 7 growth stories in the US stock market?
Or do the other 93 companies in the NASDAQ 100 index not have high-speed growth?
The answer to both questions is negative.
According to Richard Bernstein, a consulting firm, Amazon was the only technology company among the seven giants to be listed among the 130 US companies with profit growth of at least 25% in the 12 months ended October 15, 2023. That is to say, small and medium-sized enterprises have higher performance flexibility.
Source: Richard Bernstein Consulting Company
According to data from the MSCI AllCountryWorldIndex, corporate profits bottomed out in 2023 and are expected to rise in 2024. This also means that the profits of other companies in the market are on the rise, and the attractiveness of small and medium-sized enterprises is on the rise.
At the same time, small cap companies are more sensitive to interest rates and may be more likely to benefit significantly from future interest rate cuts. Market participants believe that compared to large cap companies, small cap stocks tend to have more fragile balance sheets, higher debt pressure, and less fixed rate debt. The end of the interest rate hike cycle, cooling inflation, a strong labor market, and stable consumer spending may continue to boost the performance of small cap stocks.
Mike Wilson, Chief Investment Officer and US Equity Strategy Analyst at Morgan Stanley, said that the Federal Reserve's policy shift is "good news for the stock market", which means that the Federal Reserve is starting to focus more on economic growth rather than worrying about whether the decline in inflation can be sustained. This will increase the possibility of a soft landing, which will drive small cap stocks and other sectors that have performed weaker than the market this year to enter a rebound market.
NASDAQ 100 Index - Combining "Giants" and "Potential"
As of the close on January 8th, the weight of the "Seven Giants" in the NASDAQ 100 Index is 38%, which means that nearly 40% of the index's positions are focused on seven large technology stocks; In addition, over 60% of the positions are distributed among 93 small and medium-sized technology enterprises, which also has a good balance of "potential 93".
Data source: Wind, as of April 8, 2021
From a ten-year perspective, it is also superior to major US stock indices such as the Nasdaq Composite Index and the S&P 500, while significantly outperforming other core global market indices such as the FTSE 100 in the UK, DAX in Germany, and CAC40 in France.
Source: Wind, statistical interval from January 1, 2014 to December 29, 2023. The Nasdaq 100 Index was released on February 1, 1985, and its past performance does not represent future performance.
The NASDAQ 100 ETF (159659) closely tracks the NASDAQ 100 index and efficiently lays out high-quality technology stocks overseas. Since the beginning of this year, funds have continued to borrow NASDAQ 100 ETF (159659) to increase their holdings in US technology stocks. As of January 9th, NASDAQ 100ETF (159659) has received a net inflow of approximately 2.61 million yuan, representing a total net inflow of 7.73 million yuan for four consecutive days. According to Wind data statistics, among the ETF products that also track the NASDAQ 100 index, the NASDAQ 100 ETF (159659) is one of the products with the lowest management fee, which is conducive to investors laying out global technology leaders at a lower cost.
This fund has off exchange linked funds (Class A: 019547, Class C: 019548) available for off exchange investors to choose from.
NASDAQ 100 ETF Fund Full Name: China Merchants NASDAQ 100 Traded Open End Index Securities Investment Fund (QDII)
Risk warning: Funds carry risks and investment should be cautious. The above viewpoints, views, and ideas are based on the current situation and may change in the future. We do not make any substantial guarantees or commitments regarding the authenticity, completeness, and accuracy of the opinions or information cited from external institutions such as securities companies. The NASDAQ 100ETF can invest in overseas markets. In addition to bearing general investment risks such as market volatility risks similar to domestic securities investment funds, this fund also faces unique risks such as exchange rate risks arising from investing in overseas markets. The past performance of a fund does not represent its future performance, and the performance of other funds managed by the fund manager does not constitute a guarantee of the fund's performance. Investors should carefully read fund legal documents such as the Fund Contract, Prospectus, and Product Information Summary, fully understand the risk return characteristics of fund products, and based on understanding the product situation and listening to the appropriate opinions of sales institutions, make independent decisions on fund investment according to their own risk tolerance, investment period, and investment goals, and choose suitable fund products.
The performance of the Nasdaq 100 index in the past five years has been 37.96% (2019), 47.58% (2020), 26.63% (2021), -32.97% (2022), and 53.81% (2023), respectively. The NASDAQ 100 Index is compiled and published by NASDAQ Stock Market Corporation. The index compilation party will take all necessary measures to ensure the accuracy of the index, but does not make any guarantees, nor is it responsible to anyone for any errors in the index. The past performance of the index does not represent its future performance, nor does it constitute a guarantee of fund investment returns or any investment advice.