The Nasdaq Composite breached the 6,000 level for the first time on Tuesday as investors pile into technology and smaller companies with strong growth prospects amid concerns Donald Trump will be unable to spark inflation through tax cuts and big public spending plans.
The rally, which extended the tech-heavy benchmark’s double-digit gain for the year, also saw the Russell 2000 index of small capitalisation stocks hit a new all-time peak.
Until this month, Wall Street’s post-election rise has been driven by “Trumpflation” expectations that a Republican-controlled Washington will usher in a sweeping pro-business agenda including deregulation, tax cuts and a $1tn infrastructure plan.
But recent data showing unexpected weakening in consumer prices and signs Mr Trump is stumbling in his domestic agenda has reset forecasts, leading investors to hunt for companies with underlying growth prospects regardless of the macroeconomic environment.
“This is a risk-on rally but not a reflation rally — one of the characteristics of this market year-to-date has been a strong outperformance by growth over value,” Russ Koesterich, portfolio manager at BlackRock’s Global Allocation fund, said.
Renewed appetite for technology stocks and a rally in the so-called “Fangs” — Facebook, Amazon, Netflix and Google-parent Alphabet — has spurred a near 12 per cent gain for the Nasdaq in 2017, well ahead of the S&P 500’s rise of 6.5 per cent.
Fang stocks have collectively added $245.8bn to their market values since the end of last year. All have hit new record highs this month. Smaller technology and biotechnology groups have also been bid-up by investors.
On Tuesday, the Nasdaq climbed as much as 0.7 per cent to 6,029.68 after closing at a fresh record high in the previous session.
Despite concerns Mr Trump will be unable to deliver on his fiscal promises, many investors remains hopeful, particularly after the White House signalled this week it plans to introduce legislation that aims to reduce the corporate tax rate to 15 per cent, from 35 per cent — among the highest in the world.
Tech companies, in particular, would stand to gain from Mr Trump’s tax agenda. According to Moody’s, the sector accounted for 55 per cent of the $1.3tn in total US corporate cash held overseas in 2016 with companies like Apple reluctant to repatriate profits and face a comparatively high American tax bill.
If the cash were moved to the US, it could be used to fund shareholder-friendly initiatives, like share buybacks and dividends, as well as increased capital spending and acquisitions.
Tax reform is “acting like a huge carrot” as “lower corporate tax rates helps the bottom line and relieves some of the fears of the excessive valuations that are in the market”, said Bruce Bittles, chief investment strategist at RW Baird.
Geopolitical risks have also receded, with investors welcoming the likely victory of centrist Emmanuel Macron, a mainstream economic reformer, over rightwing populist Marine Le Pen in next month’s French presidential run-off.
Wall Street investors will also closely scrutinise earnings from technology companies, with reporting picking up steam towards the end of this week. Analysts reckon the sector will produce earnings growth of north of 13 per cent in the first quarter, according to FactSet data, representing an uptick from 10 per cent pace notched in the final three months of 2016.
Alphabet and Microsoft, which each have market values of more than $500bn, are scheduled to report on Thursday. Apple, the world’s biggest company by market cap, and social media giant Facebook are on deck the following week.
Randy Fredrick at Charles Schwab said that so far, results had been solid. Of the 15 tech groups that have reported, only one has beaten earnings estimates.
Despite the already strong start to the year, the technology sector could have more room to run. Dennis DeBusschere, head of portfolio strategy at Evercore ISI, said gains for the sector could continue, particularly if the economic outlook once again began to brighten and the Federal Reserve was gradual in tightening monetary policy.
“Tech stocks have a unique mix of defensive, growth and cyclical characteristics so would expect technology stock outperformance to continue as sentiment over the economic growth outlook improves near term and investors expect continued accommodative central bank policy,” he said.
