Productivity Gains for Small Caps?
Macro Perspectives
5 Points
Stocks in the US closed higher on Thursday, supported by gains for heavyweight tech companies, as markets continued to assess the latest economic data and Fed speak for insights into the central bank’s policy trajectory.
The S&P 500 posted gains of 0.88%, the Nasdaq 100 added 1.35%, driven by the strong outperformance of tech megacaps, while the Dow rebounded with a gain of 202 points.
Additionally, US-listed TSMC shares soared by 10.08% following the chip producer's release of strong corporate results.
On the other hand, hawkish signals from the Fed lifted Treasury yields and reduced expectations of a rate cut by March, with Atlanta Fed's Bostic stating he doesn’t anticipate lower rates until the third quarter.
Consistently, initial unemployment claims unexpectedly fell to a 16-month low, highlighting the tightness of the labour market.
Macro Perspectives
The trend that dominated much of last year is back - divergence between the performance of big tech stocks and small cap (and value) stocks.
The Nasdaq is now just 3% off of the 2021 record highs. Meanwhile, the Russell 2000 (small caps) is still 21% off of the 2021 highs.
We talked late last year about the opportunity for small caps, the laggard, to catch up, and there was indeed a big run into the year end - the Russell 2000 rallied 28% over the final two months of the year (Oct 27 through the year end).
What's driving the divergence thus far in the New Year? It continues to be all about generative AI and the past two weeks have been a global promotion for it. It started with the Computer Electronics Show last week in Las Vegas and this week, as we discussed yesterday, the climate agenda in Davos seems to have been upstaged by the technology revolution.
The pendulum seems to have swung from fear to greed.
What the investment community hasn't sorted out just yet, is the productivity influence generative AI will have on all businesses - all people. Given that small companies tend to have less benefit from economies of scale than large cap companies, small caps could have the most to gain from the productivity gains of generative AI.
Now, perhaps the most important moment at this World Economic Forum this week (thus far) was the speech made by the newly elected President of Argentina. It's a must watch. This link below uses AI to translate to English, in his voice (original transcripts here).
It's a an important speech in an important year - a year that will determine the direction of the global economy, policy and (very likely) the balance of power in the world.