Wall Street still counts on Big Tech Rip once Fed eases hikes

(Bloomberg) – Wall Street’s tech bulls are counting on the industry’s megacap stocks to rise quickly and start a rebound in the S&P 500.

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The hope is that the Federal Reserve is about to conclude 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, edged closer to reality on Friday when the latest jobs report showed a deceleration in wage growth, which the Fed is looking for as a sign of progress in its battle against inflation. Unsurprisingly, the tech-heavy Nasdaq 100 index had its best day since Nov. 30.

“Even a small step into tech megacaps will count,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas. “This is going to be positive, and not just for tech investors. This will send a signal to the whole S&P.

More clarity will likely come this week when investors receive the latest inflation update. A Bloomberg survey of 12 economists calls for a 6.5% jump in the consumer price index in December, down from a 9.1% level in June. A University of Michigan survey of US consumers showed inflation expectations for the year ahead fell to their 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 much of a hold tech megacaps have in the market today. wider.

“At the end of the day, if the Fed gets inflation under control, tech has a chance to be the market leader, but the Fed is still in the game for at least another six to eight months,” said Chris Zaccarelli, chief executive. investments at Independent Advisor Alliance.

But an economic downturn that leads to a change in the Fed also carries its own risks. Apple has ordered fewer components for a number of products in light of slowing demand, Nikkei reported on January 2. UBS analysts have questioned the growth prospects for Microsoft Corp.’s cloud computing business, while Tesla grapples with declining sales in China.

The next earnings season could turn the tide, but so far it looks bleak. S&P 500 companies are expected to post a 2.7% drop in fourth-quarter earnings, according to data compiled by Bloomberg Intelligence. Excluding the five largest constituents of the S&P 500, the figure rises to just -0.9%.

“Investors are either dealing with inflation uncertainty or growth anxiety, and either way it’s a lose-lose situation for tech megacaps,” said Zacarelli.

Tech giants have led the stock market bull run for most of the past decade. They also dominated during the Covid-19 pandemic when investors devoured all things digital. However, that trend reversed last year when rising prices forced the central bank to retaliate and cut rates to near zero. As interest rates climbed and growth prospects deteriorated 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, behind both the Nasdaq 100 index and the S&P 500.

The technological slowdown has had an outsized influence on major 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 total, one gauge tracks four technology giants Technology — Alphabet, Amazon, Meta and Netflix Inc. — rose 3.2% for the week, while a broader gauge that includes Tesla and Advanced Micro Devices Inc. fell 1%.

More often than not, no other sector is large enough to offset a move in technology stocks. And even though FAANG’s influence on the S&P 500 is diminishing as giants like Apple decline in market value, the group remains enormous. To give an idea of ​​its size: the share of the four tech titans in the S&P 500 – Apple, Microsoft, Alphabet and Amazon – stands at around 16%, more than the entire health care group, the second of the index. the biggest industry after technology.

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

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