Great Quarter, Guys

A classic market cliché’ has become a staple of company earnings calls.  All too often, an analyst leads off with “great quarter, guys” before launching into a question.  This may be occurring less because (1) it’s become almost meme-worthy, and (2) C-suites are not as male-dominated as they once were.  Cliché or not, it is an appropriate phrase to describe the second quarter that ended yesterday.  This was a phenomenal quarter for equity investors, particularly those who were overweighted in tech shares.

We came into the quarter with overriding concerns about the Persian Gulf War, and those concerns ebbed markedly as the calendar flipped from March to April.  It is nigh impossible to know the degree to which the selloff and recovery was merely the result of the calendar turning from one quarter to the next, but the change in sentiment certainly seemed to coincide with that timing.  Remember the “ratchet effect” – the market’s propensity to rally on any positive news about an easing of tensions while shrugging off geopolitical setbacks.

This quarter was driven by two important, intersecting factors.  First, earnings were a positive surprise.  A wide range of companies, particularly those supplying valuable hardware to AI hyperscalers, beat consensus earnings and raised already elevated guidance.  That is as good a reason as any for a company or sector to rally.  The second reason was momentum.  Once those key tech stocks resumed their advances, the upward moves were amplified by buyers eager to hop onto already positive trends.  Solid earnings can remain a positive catalyst if they are sustained, though momentum rushes, particularly when powered by leverage, can leave a market overextended.  But those are issues for the coming quarter.

Some may be surprised to see that as good a quarter as this was for US-based technology shares, Japan-based tech shares led that market to outperform most of the world’s developed markets.  (All subtables sourced from Bloomberg and Interactive Brokers)

Past performance is not indicative of future returns.

Technology paced those gains by a wide margin, led by semiconductor companies like Kinoxia:

Past performance is not indicative of future returns.

It should be no surprise, then, that semiconductors were the place to be in this quarter.  Small caps performed quite admirably, whether powered more by hopes for AI-driven efficiencies or simply by speculative fervor:

Past performance is not indicative of future returns.

Within the S&P 500, information technology, which encompasses a wide range of technology stocks, was the clear leader.  It is interesting to see real estate performing so well, however, considering the rise in interest rates brought on by a hawkish new Fed Chair:

Past performance is not indicative of future returns.

We’re not off to a roaring start to the new quarter, but that might simply be the result of aggressive traders taking a well-deserved breather.  This quarter will be driven by (1) whether lofty corporate expectations can be met, and (2) whether huge momentum-driven rallies can be maintained.  Other factors will revolve around whether a sustainable solution to the situation in the Persian Gulf can be maintained, how an inflation-concerned Kevin Warsh might implement new policies, and how the midterm elections will shape up.  Stay tuned!