Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)

(07/07/2023)

1．US major stock indices hit new year-to-date highs.

Major stock indices such as the S&P 500, Nasdaq Composite and Dow Jones Industrial Average reached new year-to-date highs this week (July 3). Slowing growth in the PCE (Personal Consumption Expenditures) price index released last week hinted at a moderation in inflation, indicating expectations of a soft landing. The S&P 500 is up 24.6% from its one-year low (October 12, 2022). This is in line with the trend that I stated in this article, “A rise of more than 20% from the latest low is considered a bull market.” Chart 1 shows how the Nasdaq 100 and S&P 500 have changed since the beginning of the year. In the first half of this year, the strong performances of 7 companies with the highest market capitalization (GAFAM + Nvidia + Tesla), which are called the “Big Seven”, has pushed up the Nasdaq market on the “AI boom” and drove the recovery of the S&P500. The Nasdaq 100 rose 38.6% from  January to June, setting a new record for the first half of the year. For reference, the S&P 500 in July has risen for 8 consecutive years (2015 to 2022). It seems to be an anomaly (seasonality) that makes us look forward to the summer rally again. However, past market performance may not be repeated. We should take note that the forecast of additional interest rate hikes at the FOMC (Federal Open Market Committee) to be held on July 25 and 26 may pressure the stock prices down.

<Chart 1> Year-to-date strength in US stocks led by large-capital stocks of Nasdaq

2. Apple inside your portfolio? Presence of “$3 trillion market capitalization”

Under these circumstances, Apple (AAPL) hit a new high since listing on June 30. The market capitalization exceeded $3 trillion  for the first time as the company’s stock is up 48.1% year-to-date. The market capitalization exceeded approximately 430 trillion yen or  expanded 11 times more than Toyota Motor Corporation, the Japan’s largest market capitalization (approximately 38 trillion yen) (as of July 3). The reason Apple’s corporate value (≒ market capitalization = market evaluation) has expanded so far is due to the company’s high growth potential and high profitability. Besides products (hardware) such as the iPhone and Mac, service revenue (software) is growing, as well as aggressively expanding into new fields such as automobiles (EVs and autonomous cars) and healthcare. Chart 2 shows the “Big Seven” in the US market, arranged in descending order of market capitalization (unit: USD 100 million). Apple accounts for about 7.7% of the S&P 500 market capitalization weight. Owning an index fund that tracks the S&P 500 means holding an equally weighted share of Apple stock. In addition, Apple is by far the number one weight in the stock portfolio of Berkshire Hathaway, which invests in Japan general trading company stocks, with over 46% weighting (Q1 2023 SEC report: Form 13F). CEO Warren Buffett praised Apple as “a better business than any business we own” at the company's annual shareholder meeting in May. Buffett’s favourite stock is Apple. A long time ago, a commercial called “Intel Inside” (PC) was famous. Now, it seems that both institutional investors and individual investors can no longer ignore the question, “Apple in your portfolio?”

<Chart 2> Compare the market capitalization of the “Big Seven” led by Apple

3. Significance of placing US stocks at the core of asset building

We have entered the second half of the year in July. I have compared the long-term market performance as of the end of June, the end of the half term, in terms of the total return index (total return including dividends) of US stocks, world stocks and Japan stocks (Chart 3). Outstanding performance is the “yen-dominated US stocks” which has grown about 21.4 times since the beginning of 1993, about 30 years ago. In the first half of the year, in addition to the “AI boom,” the yen-denominated total return performance improved further because of the foreign exchange gains due to the trend of yen depreciation (strength of the dollar) from last year. Yen-converted world stocks (the MSCI World Stock Index total return index) also performed about 11.8 times higher than at the beginning of 1993. Japan stocks (TOPIX total return index) have improved in recent years, but they remained at about 2.8 times compared to the beginning of 1993. The US continues to rank first in terms of GDP in the world and is one of the world’s leading producers of energy and agricultural products, with the total population and working population continuing to grow due to immigration. The US is still the core of the world core with its military superiority, innovation (technology innovation) and high ability to drive the capitalist economy. When compared based on the MSCI index, the forecasted average ROE (return on equity) of the US stock market is about 18%, overwhelming other markets. In addition to the high return rate on shareholders’ equity, the “shareholder-focused” management stance symbolized by active share buybacks and the management awareness on the company’s stock price level are the best in the world. In addition, based on past long-term market performance, investment education is rooted in US individual investors to “Stay Invested” (long-term investment is the essence of asset building), encouraging “buy on decline” and make “bargain hunt” when stocks fall in the short term. Moving forward, I believe it is rational to build a globally diversified investment centered on US stocks from a long-term perspective.

Name: Mutsumi Kagawa
Title: Chief Global Strategist
Organization: Rakuten Securities Economic Research Institute
Bio: Mutsumi Kagawa has an extensive background in the field of finance. In 1989, he began his career as a fund manager and investment researcher at various institutions, including Nikko Securities Investment Trust (Nikko Asset Management), Citibank, and Tokai Tokyo Research Center. With his experience working in the United States, Kagawa brings a global perspective that is highly regarded in his current role as the Chief Global Strategist at the Rakuten Securities Economic Research Institute.