In 2023, the US stock market showed strong performance and repeatedly hit new highs, especially with the $NASDAQ(.IXIC)$ rising 43% for the year. $S&P 500(.SPX)$ and $DJIA(.DJI)$ also rose by 24% and 14% respectively, approaching and setting new historical highs.
What drives the market to new highs?
Profit contribution dominates, risk premium pressure decreases; growth outperforms, and big-tech leaders dominate.
Profit contribution dominates, and the decrease in risk premium pressure offsets interest rate changes. From the perspective of valuation and profit contribution, the S&P 500 index rose by 24%, with valuation contributing 17% and profit contributing 6%; the Dow Jones index rose by 14%, with valuation contributing 6% and profit contributing 4%; Nasdaq index rose by 43%, with valuation contributing 19% and profit contributing 21%; and among the 75% increase in technology leader stocks, profit contributed a significant 36%.
This indicates that the rise in technology leader stocks is not "baseless", but rather profit contribution is even greater. Despite the increase in valuation and a significant decline in risk-free interest rates since November, profit and the decrease in risk premium pressure remain the main drivers of performance throughout the year.
What supports the high valuation?
The increase in valuation benefits from the decrease in risk premium, with the contribution of major index risk premium exceeding 80%.
Specifically, the 12-month dynamic valuation of the S&P 500 index is at 19.6 times, reaching a new high since the second half of 2021, with a 17% expansion in 2023, of which the risk premium contributes 14% and the risk-free interest rate change is 2%; the 12-month dynamic valuation of the Nasdaq index is at 27.2 times, reaching a new high since 2022, with a 19% expansion in 2023, and the risk premium contributes 17%; while the valuation of leading technology stocks expands by 30%, with the risk premium contributing 27%.
The US government is backstopping private sector credit, which is leading to a downward trend in risk premiums.
What drives profit recovery?
The earnings of US stocks show a very obvious "rolling" characteristic, similar to the structural mismatch that occurs in the US economic cycle. The real estate and investment began to gradually slow down in 2021, while service consumption did not start to recover until the middle of 2022, and corporate profits showed a similar pattern.
The main reason for the structural strengthening of profit is the growth of business income driven by AI and the continuous effectiveness of cost reduction measures.
First, leading technology companies have improved their profitability by reducing costs through measures such as layoffs, and sales and management expenses have been continuously declining since the fourth quarter of 2022.
Second, the AI application boom has also boosted the income and profitability of companies in related fields. The profit growth rate of leading technology stocks has significantly increased for three consecutive quarters, rising sharply from -32.1% in the fourth quarter to 11.7%.
2023 Policy Review: Unexpected fiscal expansion supports growth, with financial liquidity leading the trend of the US stock market
The expansion of fiscal policy beyond expectations has been the key factor in the outperformance of the US stock market for the whole year. After the risk event of mid-sized and small banks in March, the US government's continued "backstopping" of the private sector and the Fed's "balance sheet expansion" providing liquidity support have helped the stock market not only to withstand the pressure amid the backdrop of rising risk-free rates driven by expectations of interest rate hikes in the first half of the year, but also led to the outperformance of rate-sensitive growth styles.
The accelerated growth in the third quarter under the fiscal stimulus has also boosted the performance of listed companies in the US stock market, especially for traditional companies that are not benefiting from the AI trend. After four consecutive quarters of decline, non-financial revenue in the S&P 500 rose and turned positive in the third quarter, and profit growth followed suit.
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