What happened
Tech stocks made a big comeback in the first half of 2023 after a rough 2022. It's possible that the market got a little too pessimistic last year, but that's led to the rise we see in shares right now.
According to data provided by S&P Global Market Intelligence, three of the biggest movers this year are Spotify (SPOT 0.20%), HubSpot (HUBS -0.78%), and Broadcom (AVGO 3.84%), which are up 117.9%, 92.2%, and 58.7%, respectively, year to date.
So what
Cost cutting has been a theme in tech, and Spotify and Hubspot have both announced layoffs to reduce costs and focus the business. The cuts seem to be both necessary and opportunistic. As the market focuses on how much money companies can make, it's important for both to increase cash flow that's dangerously close to breakeven.
SPOT Free Cash Flow data by YCharts.
Broadcom has been one of the beneficiaries of the semiconductor boom from everything from AI to an improving economy. The company may not be at the center of AI, but it's riding its tailwinds, and that has helped the stock this year.
All of the tech industry has been helped by an economy that's better than most economists predicted to start the year. According to government data, the U.S. economy grew 2% in the first quarter, but it's becoming clear that an economic collapse that some predicted is not on the horizon. Unemployment is low and wages are strong, so the layoff that I talked about earlier seems to be isolated to the tech industry.
Mix all of this together and you get a market that's much more bullish on tech than it was just a few months ago. That has helped the whole industry, but now we need to see earnings match the higher expectations investors have.
Now what
Optimism has clearly returned to the market, and that's why some of the hottest pandemic stocks are hot again. What's different now is that Spotify and Hubspot have increased revenue by 15% and 55%, respectively, over the past two years, while their stocks are down 35% and 4%. Broadcom has actually seen an 83% increase in its stock over that time as financials have continued to get better.
I think the companies that have survived the last two years will thrive long term, and that's why we are seeing the performance we have on the market.
That said, we do need to see strong results in the second quarter and improving guidance for the second half of the year. Earnings season begins in earnest next week, and investors will be watching the growth numbers and operating margins closely.
Don't be surprised if the market pulls back after earnings. The run higher in 2023 can't last forever and will be driven by earnings long term. The good news is that earnings look like they're heading in the right direction, and that's why I stay invested rather than try to time the ups and downs of the market.
