The rally in equities of recent months is not a simple by-product of lower interest rates. The resilience of the US economy in the face of persistent, so-called ‘global, macro uncertainty’, offers a compelling narrative: investment in technology – specifically, information processing equipment and software – has held up very well so far this year.
The Philly Semiconductor index hit a new all-time high on Friday, and is now up 42.72% since the end of 2018. The biggest advances have come from Teradyne (+102.74%), Lam Research (+98.3%), KLA (+89.90%), Cypress Semiconductor (+83.57%), Advanced Micro Devices (+77.19%), Entegris (+72.00%), ASML (+69.63%) and Cirrus Logic (+69.05%).
Other notable gains include Taiwan Semiconductor Manufacturing Company (+38.53%). TSMC is trading at an all-time high. The migration to 7-nanometer chips has proceeded much faster than many industry observers expected.
The proliferation in 7-nanometer chips reflects in part the boom in AI applications. But the arrival of 5G is also benefitting other semi-conductor manufacturers in the US (notably Teradyne).
The stock market could dip on FOMC disappointment this week, if the Fed calls a halt to rate cuts. But the combination of low inflation, modest wage reflation and enduring economic strength will remain supportive. Getting this far into October, without a big hiccup for risk assets, has been a notable positive. October has been a notoriously volatile month. Any modest reversal this week could be followed by a powerful rally.
