The Large Cap Rally Is Largely About These 3 Stocks

Large Cap write on sticky notes isolated on Wooden Table.

If this year’s stock market were likened to a weight lifting exercise, it would be a shoulder shrug.

Investors shrugged off recession talk and mixed earnings reports on Monday to erase much of last week’s losses. It was another example of a ‘buy the dip’ mentality that has prevailed thus far in 2023 — and has the S&P 500 up 8% year-to-date.

As global equities continue to drift from their October 2022 low, broad sector participation lends credence to the recovery. All 11 GICS sectors have advanced since October 13th. The industrials, financials, materials and technology groups are each up at least 20%.

For U.S. large caps, the bull run has also been well attended at the sector level, but a select few mega caps have the biggest impact. Warner Bros. Discovery, Catalent and Align Tech have gained more than 50%, but their small S&P 500 weightings limit their overall contribution.  The benchmark’s largest components — Apple, Microsoft, Alphabet and Amazon — are up in 2023, but aren’t having the same influence as in years past. 

With a combined weighting of more than 4%, its strength in these three tickers that have much to do with the S&P’s 2023 performance.

Tesla’s Prices Are Falling…Why Is the Stock Rising? 

Tesla, Inc. (NASDAQ: TSLA) accounts for nearly 1% of the S&P 500’s 8% year-to-date return. No other company in the index is off to a hotter start. 

The EV leader found another gear after it reported 40% earnings growth for the fourth quarter. The result surpassed Wall Street’s expectations and demonstrated positive vehicle production and delivery trends. Better profits in the less-discussed Energy Generation & Storage business also helped push Tesla over the top.

In contrast to the higher average selling prices for Tesla’s sedans and SUVs witnessed in Q4, price cuts have been the theme in the current quarter. As much as $13,000 was slashed from the Model 3 and Model Y stickers in the U.S., and similar rollbacks have been implemented in the Greater China market. 

Tesla’s shift from being a luxury brand for the affluent to an affordable brand for the masses has been remarkable. From 2017 to 2022, the average price on a Tesla EV was halved. During the same period, operating margins went from red to black. This long-term trend has investors unfazed by the recent price cuts and Tesla at the front of the S&P 500 race.

Which Company Is Driving the Semiconductor Rally?

NVIDIA Corporation (NASDAQ: NVDA) has roughly the same weighting as Tesla in the S&P 500. Its 49% year-to-date climb is a big reason why stocks are off to their best start since 2019. The chipmaker is also leading a resurgence in semiconductors which, alongside auto manufacturers, is this year’s best-performing industry. It’s a fitting duo given NVIDIA’s recent push into the auto market.

Last month, the company announced that it joined forces with the world’s leading tech manufacturer Foxconn to develop automated EVs. Foxconn will produce electronic control units (ECUs) based on the NVIDIA DRIVE Orin chip. The technology will present automakers with an all-in-one solution for self-driving capabilities and an AI command center.

Although NVIDIA’s automotive segment is a small part of the business, this is a significant step towards being an influential tech player in the global EV and autonomous vehicle markets.

Whether or not the volatile stock’s recent gains hold up will likely depend on next week’s earnings release. If management can show continued strength in data centers and an improvement in gaming, NVIDIA could overtake Tesla as this year’s top S&P stock. If the report is disappointing, look for it to have a significant drag on market direction.

Is Meta Platforms Stock Headed Back to $200?

Meta Platforms, Inc. (NASDAQ: META) gapped up in good volume on better-than-feared fourth-quarter revenue. Despite continued weakness in advertising demand, the market felt the worst might be over for Facebook, Instagram, Messenger and WhatsApp. 

Some $4.2 billion in cost cutting measures tied to layoffs, facilities consolidation and nixing several data center projects helped Meta Platform reduce its 2023 expense guidance. This was the report's highlight because it showed expense reductions are working and profits could improve as the economy does the same. 

The stock’s 23% post-earnings jump was supported by a favorable regulatory ruling on the same day of the report. A federal judge shot down the FTC’s request to block Meta’s takeover of virtual reality fitness game maker Within Limited.

The FTC’s assertion that this would limit competition in the VR fitness app market proved unfounded. Being able to proceed with the deal for the Supernatural app maker is significant for two reasons: 1) the app’s popularity will give Meta Platform a major inroad to the fast-growing VR space, and 2) an antitrust victory of any magnitude bodes well for Mark Zuckerberg’s metaverse ambitions.

Meta shares have sold off since reaching their highest level since June 2022 but, up 49% year-to-date, are having a big impact on the overall market. The consensus price target points to a potential return to $200, with some analysts forecasting a push toward $300.

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