Wall Street Still Counting on Big Tech Rip Once Fed Eases Hikes

(Bloomberg Opinion) — Tech bulls on Wall Street are counting on mega-cap industry stocks to rally soon and start a rally in the S&P 500.

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The hope is that the Federal Reserve is close to concluding its campaign to fight inflation, and that technology, the group that has suffered the most from interest rate hikes, will recover. The prospect, while not yet imminent, came a step closer to reality on Friday when the latest jobs report showed a slowdown in wage growth, which the Fed is looking to as a sign of progress in its battle against inflation. . Perhaps not surprisingly, the tech-heavy Nasdaq 100 Index had its best day since Nov. 30.

“Even a small advance in tech mega-caps will matter,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, Texas. “That’s going to be a positive, and not just for technology investors. It will send a signal to the S&P in general.”

There is likely to be more clarity this week when investors get the latest update on inflation. A Bloomberg survey of 12 economists forecasts a 6.5% rise in the consumer price index in December, down from the 9.1% level in June. A University of Michigan survey of American consumers showed inflation expectations for the coming year fell to the lowest level since June 2021 last month.

The S&P 500 lost 6.7% between early December and Thursday, with two stocks, Apple Inc. and Tesla Inc., responsible for a third of the decline, showing just how strong a grip tech mega-caps have. in the broader market.

“Ultimately, if the Fed controls inflation, technology has a chance to be the market leader, but the Fed will still be in the game for at least another six to eight months,” said Chris Zaccarelli, chief investment officer at Independent Advisor. Alliance.

But an economic slowdown that would prompt a change by the Fed also carries its own risks. Apple ordered fewer components for a number of products, given slowing demand, the Nikkei reported on Jan. 2. UBS analysts questioned the growth prospects of Microsoft Corp.’s cloud computing business, while Tesla is grappling with falling sales in China.

The upcoming earnings season may change sentiment, but so far it looks bleak. Companies in the S&P 500 are expected to post a 2.7% profit decline in the fourth quarter, data compiled by Bloomberg Intelligence shows. Excluding the five largest components of the S&P 500, the figure is just -0.9%.

“Investors are dealing with uncertainty around inflation, or they’re dealing with anxiety about growth, and either way, it’s a lose-lose situation for tech mega-caps,” Zaccarelli said.

Tech giants have fueled the stock market’s bull run for most of the past decade. They also dominated during the Covid-19 pandemic when investors gobbled up anything digital. However, that trend was reversed last year when rising prices forced the central bank to fight back and cut rates to near zero. As interest rates rose and growth prospects worsened in 2022, the so-called FAANG cohort (the parent company of Facebook, Meta Platforms Inc., Amazon.com Inc., Apple, Microsoft, and Alphabet Inc.) lost 38 % of its market value, lagging the Nasdaq 100 and S&P 500 Index.

The technology recession exerted a huge drag on the main indices. Apple, the largest stock in the S&P 500 by market value, and Tesla, the 15th largest, were responsible for 88% of the S&P 500’s decline on the first trading day of 2023. In all, an indicator that tracks Four tech giants — Alphabet, Amazon, Meta and Netflix Inc. — were up 3.2% for the week, while a broader gauge including Tesla and Advanced Micro Devices Inc. fell 1%.

More often than not, no other sector is big enough to offset a move in tech stocks. And while FAANG’s influence on the S&P 500 is waning as giants like Apple lose market value, the group is still huge. To give you an idea of ​​how big that is: The share of just the four tech titans in the S&P 500 (Apple, Microsoft, Alphabet and Amazon) sits at around 16%, more than the entire healthcare group, the second of the index. largest industry after technology.

“You have to be wary of tech stocks because there’s still uncertainty that the Fed will go further by raising rates,” said Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory. “Technology will eventually have its day, but until we get more clarity on central bank policy, it’s a tough place to invest.”

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