US stocks chalk up biggest quarterly gain in six years

Stay informed with free updates

Simply sign up to the US equities myFT Digest — delivered directly to your inbox.

US stocks closed out their strongest quarter in six years, even as fallout from the Iran war, wild swings in chip companies and the record-breaking SpaceX initial public offering spurred volatile trading over the past month.

Wall Street’s S&P 500 and the tech-heavy Nasdaq Composite added 14.9 per cent and 21.4 per cent, respectively, in the three months ended June 30. That marked their best runs since the same period in 2020 when markets snapped back from heavy losses in the months after the outbreak of Covid-19.

A slide in oil prices, red-hot performances by semiconductor stocks and signs of resilience across the US economy fuelled a rally for the S&P 500 since the end of March that peaked on June 2.

The following fortnight was dominated by SpaceX, which raised $75bn in a historic IPO on June 11 and surged to an almost $3tn valuation over the subsequent week.

Shares in Elon Musk’s rockets-to-AI conglomerate slipped in the second half of the month, however, as investors’ concerns about when Big Tech’s huge spending commitments on AI infrastructure will generate returns weighed on richly valued stocks.

The S&P 500 slipped 1.1 per cent in June as investors rotated out of the Magnificent Seven megacap tech stocks and into industrials and defensive sectors including healthcare. The Nasdaq Composite dropped 2.8 per cent.

In contrast, the Russell 2000 small-cap index this week powered to a record high, reflecting a vote of confidence by investors in the health of the world’s largest economy.

“After the April and May surge, market consolidation and broadening were both welcome and healthy,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

On Tuesday, the S&P 500 closed 0.8 per cent higher and the Nasdaq Composite rose 1.5 per cent, leaving them up 9.6 per cent and 12.8 per cent, respectively, so far this year.

“Not everything in the market squares up right now,” said Eric Johnston, Cantor Fitzgerald chief equity and macro strategist.

“The logic . . . at the moment is that [semiconductor companies] will generate huge revenues for years to come but that hyperscalers are making bad investments and will continue to spend,” he said.

Chip groups account for almost one-fifth of the S&P 500’s total market capitalisation, the highest share on record, according to Citadel Securities analysts.

Huge demand and limited supplies have created a bottleneck in many of the components required to run the agentic AI software popularised by OpenAI and Anthropic.

Memory companies, power providers and other AI infrastructure groups have emerged as the biggest winners, with huge profit increases in the first quarter helping the S&P to its highest year-on-year earnings growth rate since the end of 2021.

“AI is in a bubble but it is a different type of bubble from what investors are used to,” said Peter Berezin, chief global strategist at BCA Research. “With AI, the bubble is in earnings rather than in valuations.”

Bulls contend that the US economy is holding up just fine even if animal spirits are increasingly driving the AI boom.

Another source of support is the price of oil retreating to levels last seen before the US and Israel launched strikes against Iran, with a tentative ceasefire between Washington and Tehran boosting hopes of a reopening of the Strait of Hormuz. Brent crude was fetching about $73 a barrel on Tuesday, having peaked above $126 in late April.

The US labour market, meanwhile, has grown at a healthy pace, easing fears that the energy shock might weigh on hiring numbers. The latest official jobs data for June is due on Thursday.

Most investors agree that higher interest rates spurred by economic overheating would be an impediment for the stock market.

The Federal Reserve’s new chair, Kevin Warsh, used his first press conference in the job earlier in June to stress the US central bank’s dedication to bringing down inflation, which jumped to a new three-year high of 4.2 per cent in May. Traders responded by cranking up bets on interest rate rises later this year.

“The risk of a disorderly tightening of financial conditions may still be the Achilles heel of the global economy,” Bank of America economists wrote in a note this week, referring to the threat of higher US interest rates in particular.