Can the Dow's 2023 Runaway Winners Keep Running?

Key Points

• Salesforce is up more than 60% so far this year and is the Dow's best performing stock in 2023.
• Microsoft is up nearly 40% year-to-date largely due to the company’s association with AI.
• A five-month winning streak has brought Microsoft back to within 5% of its record high.
• Apple is up more than 30% this year but its valuation has become quite stretched. 

April showers really do bring May flowers.

Following a rather cloudy April, U.S. stock indices have blossomed to fresh 2023 highs in May. With the technology sector the standout performer, the Nasdaq 100 has widened an already big lead over the S&P 500 and Dow Jones 30. More than 30% separates the year-to-date returns of the Nasdaq and Dow. 

The driving force behind tech’s leadership is the arrival of artificial intelligence (AI). Anything and everything AI-related is getting bid up by investors. Along with a rebound in semiconductor names, this has created a broad set of momentum plays that will be difficult to slow. 

With a modest 17% technology weighting (versus 62% in the Nasdaq and 26% in the S&P), the Dow appears resigned to finish third in this year’s market derby. Barring a monumental second-half shift in sector leadership, the blue chip index may continue to lean on its half-dozen tech constituents to limp to a respectable finish. Three stocks in particular are running way ahead of the rest of the field. 

What Is the Dow’s Best Performing Stock in 2023? 

Up more than 60% so far this year, Salesforce, Inc. NYSE: CRM is way out in front of the Dow-30 pack. In early March 2023, the cloud software provider got a big boost from a sparkling fourth-quarter earnings report and hasn’t looked back since. 

Profitability is on the upswing partly because revenues are trending higher but mostly because of management’s sharp focus on cost-cutting. At the beginning of the year, the company announced a plan to lay off roughly 10% of its workforce, along with various restructuring and cost-saving measures. The early returns have been excellent.

Yet after Salesforce got crushed by the 2022 tech selloff, the stock may still be undervalued. Not only does it sit about $100 away from its November 2021 peak, but it also trades at 30x this year’s projected earnings. This is towards the low end of the stock’s historical average range.

Salesforce is responding as well as any software player to weakened macro conditions. And with cloud computing and digital transformation trends intact, Wall Street is forecasting even better profits over the next couple of years. Ahead of this week’s Q1 earnings report, analysts have been raising their price targets. Another bullish quarter and outlook would make Salesforce hard to sell.  

Will Microsoft Surpass Its All-Time High?

Microsoft Corporation NASDAQ: MSFT is up almost 40% year-to-date. Not surprisingly, it has much to do with the company’s association with AI. The company has gone all-in on integrating new AI systems across the business and especially in the Azure-led Intelligent Cloud segment. 

After investing $1 billion in ChatGPT parent Open AI back in 2019, Microsoft became the preferred partner for commercializing Open AI technologies. This partnership was strengthened earlier this year when the duo announced an expanded collaboration. Incorporating AI capabilities into Microsoft’s lagging Bing search engine is an early project but likely one of several more to come. 

A five-month winning streak has brought Microsoft back to within 5% of its record high — so it must be due for a pullback, right? Overheated technical indicators (including the RSI, MACD and Bollinger Bands) suggest in the near-term it probably is. But the stock will continue to trend higher over time, according to Wall Street.  

This week Deutsche Bank and Wedbush became the latest firms to give Microsoft price targets beyond its $349.67 high. Over the past month, a half dozen other research groups have done the same. This includes Jeffries, which made the stock one of its “Franchise Picks” and gave it a $400 target.

Will Apple Continue to Command a Premium Valuation?

Up more than 30% this year, the valuation of Apple Inc. NASDAQ: AAPL has become quite stretched. From 2018 to 2022, the tech innovator traded at an average trailing P/E ratio of 22x. It currently has a 30x multiple. 

In some respects, the premium valuation is warranted. In a soft discretionary spending environment complicated by cost inflation, Apple is performing better than most consumer electronics manufacturers. It is getting a strong contribution from its Services business which posted record sales in calendar Q1. The recent 4% dividend hike and $90 billion increase to the buyback authorization have also arguably made the shares more valuable.

On the other hand, weaker demand for smartphones, PCs and tablets has begun spreading to the enterprise level. As these big ticket customers account for a significant portion of revenue, this evolving storyline may not be fully baked into Apple’s stock price. And with the all-important holiday shopping season likely to come with much uncertainty, multiple contraction in the back half of the year is plausible.

Speaking of uncertainty, analyst price targets are all over the map. While most remain bullish on the iPhone maker, revised targets since the May 4th earnings report range from $149 to $205. The consensus target implies little upside. Between that and Apple’s high valuation, it seems the low-hanging fruit has already been picked.