Wall Street still believes in Big Tech Rip after Fed eases bull runs

(Bloomberg) – Wall Street tech bulls are expecting the industry’s large-cap stocks to soon move higher and begin a recovery in the S&P 500.

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The hope is that the Federal Reserve is nearing the end of its anti-inflation campaign and that the tech group that suffered the most from the rate hikes will recover. The outlook, while yet to come, took a step closer to reality on Friday as the latest jobs report showed a deceleration in wage growth, something the Fed is looking for as a sign of progress. in the war on inflation. Perhaps unsurprisingly, the tech-heavy Nasdaq 100 Index had its best day since November 30.

“Even a small advance in hypercap technology will make sense,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas. “That will be positive, and not just for tech investors. It sends a signal to the broader S&P.”

More clarity is likely to come this week as investors receive the latest update on inflation. A Bloomberg survey of 12 economists shows the Consumer Price Index will increase 6.5% in December, down from 9.1% in June. A University of Michigan survey of consumers. US consumer data showed that inflation expectations for next year fell to the lowest level since June 2021 last month.

The S&P 500 lost 6.7% from early December through Thursday, with two stocks – Apple Inc. and Tesla Inc. – was responsible for a third of the decline, showing just how powerful the tech supercaps are across the broader market.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said: “Ultimately, if the Fed gets inflation under control, technology will have a chance to be the market leader, but the Fed will still be involved at least 6 times. up to eight months.”

But the economic downturn that causes the Fed to change policy also carries risks. Nikkei reported on January 2 that Apple has ordered fewer components for some products due to slowing demand. UBS analysts question the growth prospects of Microsoft Corp.’s cloud business.

The upcoming earnings season could turn sentiment, but so far it looks bleak. Companies in the S&P 500 are expected to post a 2.7% drop in profits in the fourth quarter, data compiled by Bloomberg Intelligence shows. Excluding the five largest components of the S&P 500, the figure stands at -0.9%.

“Investors are dealing with uncertainty around inflation or they’re dealing with growth anxiety, and in both cases it’s a loss-making situation for investors,” Zaccarelli said. technology hypercapitalization”.

Tech giants have driven the stock market up for most of the past decade. They also dominated during the Covid-19 pandemic as investors gobbled up all things digital. However, that trend reversed last year when rising prices forced the central bank to fight back and cut interest rates to near zero. As interest rates rise and growth prospects worsen in 2022, the so-called FAANG group — Facebook’s parent company Meta Platforms Inc., Inc., Apple, Microsoft and Alphabet Inc. – has lost 38% of its market value, trailing both the Nasdaq 100 and the S&P 500 Index.

The tech downturn has put a big drag on the major indexes. Apple, the S&P 500’s largest stock by market value, and Tesla, the 15th largest stock, were responsible for 88% of the S&P 500’s decline on the first trading day of 2023. All told. , a metric that tracks four tech giants — Alphabet, Amazon, Meta and Netflix Inc. – up 3.2% for the week, while a broader gauge that includes Tesla and Advanced Micro Devices Inc. 1% decrease.

Usually, no other sector is large enough to offset the move in tech stocks. And while FAANG’s influence on the S&P 500 is waning as giants like Apple drop in market value, the group is still huge. To imagine how big it is: the market share of just four tech giants in the S&P 500 — Apple, Microsoft, Alphabet and Amazon — is around 16%, larger than the entire healthcare group, which comes in at second. in the index. largest industry after technology.

“You have to be cautious with tech stocks because there is still lingering uncertainty that the Fed will raise rates more,” said Eric Beiley, managing director of wealth management at Steward Partners Global Advisory. again”. “Technology will eventually evolve, but until we have a better understanding of central bank policy this is still a difficult place to invest.”

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