US inflation data released on Friday strengthened investors’ confidence about the outlook for rates © Bloomberg

The Nasdaq Composite stock index has closed out its best quarter since 2020, buoyed from bets on Big Tech companies by investors who rolled back expectations for higher interest rates.

The tech-heavy index gained 16.8 per cent in the first three months of 2023 after rising 1.7 per cent on Friday. That marked the Nasdaq’s strongest quarter since the second quarter of 2020, when tech stocks led a sharp rebound from a plunge at the start of the coronavirus pandemic.

The broader S&P 500 index was also lifted by the strength in tech, adding 1.4 per cent on Friday to bring its quarterly increase to 7 per cent.

The moves capped what has been a volatile start to the year, with a strong January followed by a weak February and a rebound over the past few weeks.

Most recently, stock markets have picked up despite concerns about the health of the banking sector following the collapses of Silicon Valley Bank and other regional lenders in March. SVB’s failure and the fallout — including the forced merger of Credit Suisse and UBS — have convinced investors that the US Federal Reserve will not keep raising interest rates to fight inflation, boosting shares in large tech stocks heavily weighted in benchmark indices.

“The narrative has changed dramatically with the tug of war between the Fed and market participants,” said Rich Steinberg, chief market strategist at the Colony Group, a $19bn wealth manager.

Column chart of Quarterly % change in Nasdaq Composite showing Nasdaq's best quarter since pandemic rebound

Lower interest rates increase the appeal of companies that promise long-term growth. Mega-cap tech groups such as Microsoft and Apple are also seen as less exposed to a potential downturn in bank lending if difficulties in the regional banking sector continue.

In contrast, the Russell 2000 index of small-cap companies and the equal-weighted S&P 500 have declined for the past two months.

“Although there’s been a lot of big winners, the average stock is lingering,” Steinberg added.

Data released on Friday strengthened investor confidence about the outlook for rates. The core personal consumption expenditures index — the Fed’s preferred measure of inflation — softened in February to a year-on-year rise of 4.6 per cent, slightly lower than consensus forecasts.

Myles Bradshaw, head of global aggregate strategies at JPMorgan Asset Management, said the market “now sees rates as already having peaked and anticipates rate cuts by year-end”, though the central bank has continued to predict at least one more rate rise and no cuts until 2024.

US government bond yields declined on Friday, with the yield on the policy-sensitive two-year Treasury falling 0.07 percentage points to 4.03 per cent. The 10-year yield fell 0.08 percentage points to 3.48 per cent. Bond yields fall when prices rise.

The dollar index, which measures the US currency against a basket of six peers, strengthened 0.4 per cent.

Europe’s region-wide Stoxx 600 rose 0.6 per cent after eurozone inflation fell more than expected, leaving the index up 6.7 per cent for the quarter.

Europe’s harmonised index of consumer prices slowed from 8.5 per cent in February to 6.9 per cent in the year to March as energy costs receded. Economists had expected prices to rise 7.1 per cent.

Analysts said the figures were unlikely to deter the European Central Bank from raising rates by a quarter percentage point to 3.25 per cent when it meets on May 4.

Asian equities also advanced on Friday, buoyed by stronger than expected economic data in China. Hong Kong’s Hang Seng index added 0.4 per cent, and China’s CSI 300 rose 0.3 per cent. South Korea’s Kospi and Japan’s Topix each advanced 1 per cent.

Activity in China’s non-manufacturing sectors grew at its fastest rate in more than a decade in March as business confidence rocketed and demand grew steadily, according to a closely watched official gauge.

“This strength won’t be sustained indefinitely, however,” said Julian Evans-Pritchard, head of China economics at Capital Economics. Much of the immediate boost from dismantling Covid-19 restrictions has “already passed” and the recovery is “likely to moderate over the coming months”, he said.

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