The Fed didn't drive U.S. stock market rally so far this year, but AI did

By Frances Yue

The dominating driving force for the rally in U.S. stocks this year is generative artificial intelligence, instead of the Federal Reserve's interest rate decisions and corporate earnings, according to DataTrek Research.

All three major stock indexes have posted year-to-date gains, with the Dow Jones Industrial Average DJIA up 5.4%. The S&P 500 SPX rose 17.5%, and the Nasdaq Composite COMP rallied 34.9% so far this year, according to Dow Jones market data.

The rally was mostly driven by a few mega-cap tech stocks, according to Nicholas Colas, co-founder of DataTrek Research.

The so-called magnificent seven stocks, including Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), contributed to roughly 118% of the S&P 500's gain so far this year, Colas wrote in a note on Friday.

For global equities, the seven companies along with Taiwan Semi (TW:2330), SAP (SAP), and ASML (ASML) contributed to 87% of MSCI All-Country World Index's return so far this year, while the index consists of over 2,300 stocks.

The results are consistent with the long-term pattern, Colas noted. From 1990 to 2020, about 2.4% of U.S. listed companies generated all the stock market returns during this period, Colas noted. Outside of the U.S., the number stands even lower at about 1.4%.

Generative AI was "a legitimate catalyst because it appeared almost out of the blue exactly one year ago," Colas wrote. "Against a backdrop of generally unchanged stock prices this year, US/global Big Tech rallied because Gen AI was truly 'new new'. The combination of these two dynamics created this year's rally," Colas noted.

Non-big tech stocks have had sluggish performance so far this year, as interest rates are still much higher than a year ago, though earnings have been steady, according to Colas.

-Frances Yue

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11-17-23 1605ET

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