This Year’s AI Theme Stocks and US Treasury Short Selling Hit Big... A Signal of Revival for the Japanese Stock Market [Global Focus]

This Year's Global Financial Market Investment Issues
NVIDIA Stock Price Rises 234% This Year
'Little Buffett' Bill Ackman Bets on US Treasury Decline
Japanese Exporters Flutter Amid Super Yen Weakness

This year, the New York stock market rallied, defying early-year expectations. At the beginning of the year, Wall Street predicted that the S&P 500 index would reach 4031 with an annual gain of only 5%, amid concerns that the cumulative high-intensity tightening by the U.S. Federal Reserve (Fed) could lead to a recession (MarketWatch compiled average forecasts from 18 investment banks). Currently, the S&P 500 index stands at 4755 (as of the 22nd). The year-to-date increase is 23.8%, significantly surpassing the S&P 500’s average annual return of 10%. Despite uncertainties such as recession fears due to high interest rates and inflation, the collapse of Silicon Valley Bank (SVB) early in the year, and signs of commercial real estate downturn, tech stocks performed well and drove the U.S. stock market rally. We take a look at the major investment issues that heated up the global financial markets this year, including the AI (Artificial Intelligence) boom.

Tech Stock Rally Fueled by AI Boom... Nvidia Up 234%

This year, the U.S. stock market was led by the "Magnificent 7," a group of seven big tech companies. The Magnificent 7 refers to Apple, Microsoft (MS), Amazon, Alphabet, Nvidia, Tesla, and Meta. Especially with the AI chatbot ‘ChatGPT’ released by OpenAI at the end of last year, investors flocked to AI-related stocks. Expectations for AI companies and the view that interest rates had peaked formed the basis for this trend.

Nvidia showed the most dazzling performance. Holding 90% of the AI semiconductor market, Nvidia’s stock price rose by 234.1% this year (as of the 22nd). This is about ten times the S&P 500’s return of 23.8% over the same period. Next was Meta, Facebook’s parent company, with a 193.7% increase, followed by Tesla at 105%, Amazon at 82.6%, and Alphabet at 60.4%. Microsoft (MS), the largest shareholder of OpenAI and a beneficiary of the ChatGPT boom, rose 56.2%, and Apple increased by 49%. As the Magnificent 7’s stock prices surged, their combined weight in the S&P 500 index expanded to 30%, the highest ever. Strong earnings growth supported the stock price increases. The seven companies’ earnings in the third quarter of this year reached $99 billion, the largest ever.

However, some analyses suggest that the stocks are overvalued. The price-to-earnings ratio (PER) of these companies rose sharply from 21 times at the beginning of the year to about 30 times. Expectations of a slowdown in earnings growth have also raised concerns about a market peak. The earnings growth rate of these seven companies peaked at 52.7% in the third quarter of this year and is expected to decline to 46.2% in the fourth quarter, 31.9% in the first quarter of next year, 20.9% in the second quarter, and 10.7% in the third quarter.

U.S. Treasury Yields Surpass 5%... ‘Little Buffett’ Bill Ackman Scores Big on Short Selling

The sharp rise in bond yields was one of the hottest issues in the global financial markets this year. The yield on the benchmark 10-year U.S. Treasury note surpassed 5% in October, reaching the highest level in 17 years. The prolonged high interest rate outlook by the Fed, combined with the U.S. government’s fiscal deficit and a surge in Treasury issuance, pushed yields from around 4.1% at the end of August to 4.57% by the end of September. By October 23, yields soared to 5.02%, the highest level since 2006. As bond prices, which move inversely to yields, plunged, investors were gripped by fear. There were even concerns that the SVB bankruptcy crisis that shook global financial markets in March could recur. SVB faced a bank run after selling Treasury bonds at a loss to meet deposit withdrawals during a period of falling bond prices, ultimately leading to its closure.

Amid this, Bill Ackman, chairman of Pershing Square Capital and nicknamed the ‘Little Buffett,’ made huge profits by betting against U.S. Treasury prices. In August, Ackman publicly disclosed his short position on U.S. Treasuries, stating, "U.S. long-term Treasuries are overbought. With high inflation, the Fed is likely to keep raising rates, increasing the likelihood of bond price declines." The yield on the 30-year U.S. Treasury bond he shorted rose from around 4.1% in early August to about 5% by late October. Ackman reportedly earned $200 million from his Treasury short position. He had also made a $2.3 billion profit last year by betting on rising yields and falling prices of 2-year U.S. Treasuries at the end of 2021.

Currently, the 10-year U.S. Treasury yield has stabilized around 3.9%. This is due to easing inflation and the Fed’s announcement of a pivot (direction change) next year, which has quickly raised expectations for rate cuts. Earlier, the Fed held the benchmark interest rate steady for three consecutive times this month and lowered its year-end rate forecast for next year from 5.1% to 4.6% on the dot plot.

‘Escape from the Lost 30 Years’... Japanese Stock Market Revives on Super Yen Weakness

This year, the Japanese stock market reached its highest level in 33 years, driven by export companies posting strong earnings thanks to the super weak yen. The Nikkei 225 index rose 27.1% year-to-date, and the TOPIX index increased by 23.5%. If the Nikkei 225 rises another 17.3% from its current 33,169.05, it will surpass the peak of the bubble economy recorded in December 1989 (38,915). The revival of the Japanese stock market, escaping the ‘lost 30 years,’ is attributed to the Bank of Japan’s (BOJ) accommodative monetary policy causing the super weak yen, increased consumption due to a recovery in tourism, and more. The investment expansion by Warren Buffett, the ‘investment genius’ and chairman of Berkshire Hathaway, in Japan’s five major trading companies is also credited with driving the market’s revival. There is also a side benefit from China’s economic slowdown.

Toyota, Japan’s largest company by market capitalization, saw its stock price soar 38.8% this year. Toyota’s operating profit in the first half of this year (April to September) doubled from a year earlier to 2.5592 trillion yen. Securities firms expect Toyota to be the first Japanese company to achieve an annual operating profit of 4.5 trillion yen. The combined effects of yen weakness, supply chain recovery, and price increases significantly boosted profits. Along with Toyota, Japan’s big three automakers Honda and Nissan also saw profit growth due to increased exports from the weak yen. Their stock prices rose 33.8% and 35.2%, respectively, this year.

Additionally, the increase in foreign tourists visiting Japan due to the weak yen has boosted consumption, and the expansion of shareholder return policies by listed companies has also been a positive factor for the stock market.

Opinions are divided on whether the Japanese stock market rally will continue next year. A key variable is whether the Fed will cut rates next year and whether the BOJ will end its accommodative monetary policy, which could mark the end of the super weak yen era. Since Japanese companies’ earnings improvements are driven by the weak yen, a future yen appreciation could slow earnings growth.