Don't call it a comeback.
US mega-cap growth stocks have jumped in a monster bid to kick off the new year. The price surge in the Vanguard Mega-Cap Growth ETF (NYSEARCA:MGK) comes ahead of Thursday's AAA Day, with Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG) (GOOGL) reporting fourth-quarter results. Microsoft (MSFT), Tesla (TSLA), and Netflix (NFLX) have already released results, with mixed but generally positive price action. Overall, the S&P had its best month since 2019.
Big gains this week
Wall Street Skyline
For the month, the S&P 500 returned 6.2%, while the Nasdaq 100 ETF (QQQ) jumped more than 10.5%. Small caps, meanwhile, rose 9.8%, while foreign stocks also outperformed, as measured by the Vanguard FTSE All-World Ex-US ETF (VEU), which rose 8.7%. The bullish price action followed a notable decline in December. It was the best January for the Nasdaq since 2001.
A January to Remember: Qs Takes SPY Higher
Stockcharts.com
Within fixed income, the US 10-year yield fell from 3.87% to 3.53% on the CPI report, and softer wage growth in the December jobs report calmed investors' inflation fears and raised hopes for a more accommodative Fed in the coming months. As it stands, traders have been pricing in a terminal policy rate slightly below 5%, and this expectation has been consistent in recent months, helping to reduce interest rate volatility.
Fed Terminal Rate Seen Below 5%
Bloomberg
As for this week's FOMC meeting, barring something very extraordinary, it will be a 25 basis point hike, with all eyes on the Fed statement and ears on Wednesday's 2:30 PM press conference.
A quarter-point increase is in the cards
ECM Group
On the commodities side, it was a strong month for gold (+6%) and gold mining stocks, but oil prices fluctuated, ending around 1% lower. Natural gas fell to its worst month in 22 years amid a very mild winter in the US and Europe. These moves occurred as the US dollar index fell 1%, also helping to lift non-US stocks relative to US stocks.
Strong gold, weak oil and a falling dollar in January
Stockcharts.com
Natural Gas: Worst 2-Month Stretch Ever
Stockcharts.com
Amid the return of growth stocks and long-term assets, cryptocurrencies rallied in early 2023. Bitcoin briefly hovered above $24,000 while Ether moved proportionally. The total cryptocurrency market cap is now above $1 trillion. But let's get into the mega-caps because they'll be in play for the rest of this week with a handful of large companies reporting fourth-quarter results.
Cryptocurrencies are on the rise in 2023
TradingView
As a background, MGK offers investors exposure only to the largest domestic stocks that fall into the growth style category. Vanguard uses the CRSP index as its benchmark, so what you'll find in this index ETF is a shift away from some of the S&P-style indices. Thus, megacap growth is a bit more pure, as S&P recently shifted from more traditional growth to value due to the group's underperformance in 2022, while continuing to grow earnings.
According to Vanguard, MGK uses a passively managed, full-replication approach and has a very low expense ratio of just 0.07% per year. In terms of liquidity, the average 30-day bid/ask spread is only four basis points, while average volume is solid at over 130,000 shares. I see it as an ideal choice for playing plays on the fastest-growing names in the domestic market.
With 96 total holdings, you won't get much return on MGK, as its dividend yield is only 0.7% due to the heavy weighting of technology names. You'll also be paying for MGK shares, as Vanguard lists its P/E ratio at over 26, accounting for a high growth rate of 27%, and the PEG ratio is only about 1, which is actually lower than the broader market.
S&P Ratings by Sector
Goldman Sachs
But here's a better view. The so-called "Mega-Cap-8" rating has now returned to pre-pandemic levels, according to Yardeni Research. With earnings growth likely to stall this year, this seems like a fair valuation to me, perhaps with some short-term downside risk.
Mega-Cap-8 lags behind pre-COVID valuations
Yardeni Research
Technical adherence
Let's take a look at the broader market first. SPY is back above its declining 200-day moving average. Clearly a bullish suggestion, the ETF is also on the verge of a golden cross. Typically, when such a moving average crossover occurs with shares more than 10% below their high, expect more upward price action, according to Ryan Detrick.
I'd like to see SPY rise above its December high to reach a higher high, which would fuel a higher low set in late December. Furthermore, such a rally would undoubtedly break the downtrend from the SPY's all-time high reached over a year ago. Overall, a new uptrend is evident, and a quick-buy mentality could be a theme in 2023, compared to last year's quick-sell mentality.
SPY: Bearish to Bullish Reversal
Stockcharts.com
As for MGK, the visuals aren't as convincing. Note below that MGK simply sits near, not above, its long-term moving average, and a golden cross is a long way off.
The key to the bottom is holding the range from US$ 165 to US$ 167. Bears would like to push the mega-cap growth stock to new cyclical lows, while bulls have their work cut out for them to push MGK above an ascending resistance line. Overall, you should recognize that the SPY chart has improved significantly, but also that MGK has a point to prove.
MGK: Looking back at 200 days
Stockcharts.com
I like to monitor seasonality in broad-based ETFs, and according to Equity Watch, MGK may experience some volatility in February before hitting a low in early March. Investors should take note of this, but don't assume it's gospel.
MGK Seasonality: Upward movements usually begin in March
stock clock
The bottom line
Stocks have had a strong start to 2023, but large-cap valuations are now stretched, despite impressive earnings growth. Strategists widely expect earnings forecasts to remain low, and with the S&P 500 trading at 18 times current earnings estimates, taking some off the table is likely a prudent move ahead of what could be a difficult February. However, the technical picture is more encouraging, and I expect any short-term dips to be buying opportunities.
This article was written by
CFA and CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | Retirement I create cost-effective written content for financial advisors and investment firms across multiple formats, including blogs, emails, white papers, and social media. My passion is to give financial data a narrative. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute insights to make content relevant, accessible, and measurable. With experience in thematic investing, market events, client education, and compelling investment perspectives, I engage with everyday investors in a concise manner. I enjoy analyzing stock market sectors, ETFs, economic data, and general market conditions, and then producing bite-sized content for diverse audiences. I am passionate about the macro drivers of asset classes such as stocks, bonds, commodities, currencies, and cryptocurrencies. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to clarify points. Charts are one of the many tools I use to tell a story in a simple yet engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT experience demonstrate investment management skills, and my professional experience includes extensive public speaking and communication. Additionally, my extensive experience in university teaching and professional negotiation provides useful skills. Previous roles also included extensive use of Excel modeling and charting, as well as PowerPoint. I collaborate with The Dividend Freedom Tribe and am a contributor to Topdown Charts.
Disclosure: I/we have a profitable long position in VEU, AGG shares through ownership of stocks, options, or other derivatives. I wrote this article myself, and it expresses my opinions. I receive no compensation for it (except from Seeking Alpha). I do not do business with any company whose stock is mentioned in this article.
