To The Moon

Even though the bears of the US stock market in 2023 have been beaten up badly, the bulls have to admit that the Christmas rally, which started in November and continues so far, is a little crazy.

For the time that has no emotional baggage and just keeps moving forward, the festival don't mean much, but the operation cycle of human beings since ancient times makes the festival really have the significance of market nodes.

In 2024, almost no one dares to be bearish on the US stock market anymore. Even Mike Wilson, the famous Wall Street strategist at $Morgan Stanley(MS)$ who was a big bear on US stocks, was forced to admit his mistakes: "I was wrong all year. Powell didn't stop the easing of financial conditions, and the US stock market got a green light for a rise."

But the question investors are most concerned about is whether 2024 will still be dominated by the seven major tech stocks as in 2023?

The most unexpected 2023 bull market

The market in 2023 can be said to be the most unexpected trend among institutional investors at the beginning of the year. On the one hand, there were a series of bad news, and even a small wave of bank failures. The whole public was singing the blues about US stocks and the US economy.

In addition, there were two major problems in the US stock market during its continuous rise in 2023, which were always regarded as a rebound market rather than a bull market.

"Top-heavy" and lacks breadth

The first big problem lies in that the rise of the stock market in the first 11 months of 2023 was almost entirely driven by seven major tech stocks, while most small and medium-sized stocks remained at low levels. Considering that most growth stocks fell sharply in 2022, many growth stocks are still at historically low levels.

This extreme concentration of rises has led to more fund herding, coupled with passive buying of index funds, which has further increased the trend of share price differentiation, making the valuations of the seven major technologies at unprecedented highs. They cannot afford any decline in growth, accumulating risks for the future.

Slow recovery of financing market

As an investment market, the US stock market has made a comeback in 2023. But as a financing market, the situation is not so optimistic.

If the US stock index has taken a strong stance and is not afraid of a long-term high-interest rate environment, then the financing situation in the US market more clearly reflects the impact of tight monetary policy.

In 2023, the total number of IPOs in the US market was only slightly higher than that in 2022, down more than 90% compared with the abnormal boom in 2021. Although 2021's abnormal prosperity was not normal, the US market in 2023 was more similar to that in 2022, it can be described as a crash.

Of course, compared with the global gloom, the US stock market is still relatively good. In 2023, global IPO market fundraising was the worst since 2009. In Canada, major exchanges have had only one company completing an IPO each year for two consecutive years, which is unprecedented in the past 20 years.

To make matters worse, most of the large technology companies that have attracted much attention and listed on the US market this year failed to meet earnings expectations in their first quarterly reports. After listing, their market values fell sharply, or even fell below their offering prices, which further cooling down enthusiasm in the financing market.

2024 Smooth bullish, will the structure change?

Investment bears have been dealt a heavy blow over the past year, and with Fed monetary policy easing becoming a certainty in 2024, institutions are generally optimistic about the future.

After surviving the test of ultra-high interest rates in 2023, the probability of a soft landing for the US economy is even greater. So will the next round of US stock market rising remain extremely concentrated?

In fact, the end of this year's market has quietly begun to change, and the stock market rebound has entered a healthier phase. The recent rally has not just been a story of the seven major technology stocks.

As the $S&P 500(.SPX)$ approaches a new high, the $NASDAQ 100(NDX)$ and the $DJIA(.DJI)$ have already hit record highs, and the US stock market's rally has expanded to other areas such as small-cap stocks.

Wilson of Morgan Stanley, who has been a resolute bear for several years, wrote in a recent report: "Over the past month, we have experienced what can be described as the best breadth improvement in 2023."

The stock market's rise is shifting from leading industries such as technology, communication services, and discretionary consumer goods to sectors such as finance, industry, and real estate. In the past month, these three sectors have been among the largest gainers in the S&P 500 index.

Wilson bluntly said that Fed policy has shifted "good news for the stock market," which means that the Fed is beginning to focus more on economic growth rather than worrying about whether inflation will be sustainable. As a result, the possibility of a soft landing will increase, which will drive up underperforming sectors such as small caps.

As the market enters a broad-based rally, the outlook for the IPO market in 2024 looks set to improve amid a clear shift in Fed policy. After all, the stock market still needs to serve as a financing platform. Without outstanding growth assets listed on the market, it is impossible for the investment market to maintain long-term prosperity.

Jim Cooney, head of Americas equity capital markets at $Bank of America(BAC)$ , said: "Investors have started to search for growth assets again, and the IPO market provides this option." In addition, companies in sectors such as capital-intensive growth biotech need access to financing after two years of severe repression.

Higher pricing in the secondary market and the $Cboe Volatility Index(VIX)$ approaching its lowest level since January 2020 are helping to revive the US IPO market.

To fully revive the US IPO market, Fed monetary policy is likely to have been determined at the macro level, with market expectations indicating that federal funds rates will decline by 75 basis points in 2024.

On the other hand, there needs to be a fully active market where capital is willing to enter and purchase new shares. This means that just relying on large technology stocks to drive up the stock index is not enough.

Over the past two years, investors have been willing to pay significantly lower prices for new company IPOs, and there is a large gap between their own views and needs and those of companies. However, the gap has narrowed as interest rates have fallen and smaller shares have risen in the secondary market.

For now, the uncertainty in 2024 comes from geopolitics and the presidential election, but from a purely economic point of view, it is stable.

For now, there are several companies expected to conduct large-scale IPOs in 2024, including Fanatics (sports e-commerce platform), Shein (fast fashion e-commerce), Reddit (online community platform), as well as other high-profile companies such as SpaceX (space exploration company), Impossible Foods (artificial meat company), and Databricks (big data company).

Before the holiday season comes to an end, here's one last prediction for 2024: big tech stocks will remain stable, and opportunities for second-tier and third-tier technology stocks will increase, leading to further recovery in the IPO market.