(Bloomberg) — Wall Street tech bulls are counting on the industry’s megacap stocks to rally higher and jump start the S&P 500 before long.
Most Read from Bloomberg
The hope is that the Federal Reserve is nearing the end of its campaign to fight inflation and that the tech group, which has been hit hardest by rising interest rates, will recover. The prospect, though still imminent, moved a step closer to reality on Friday when the latest employment report showed a slowdown in wage growth, which the Fed has been looking for as a sign of progress in the fight against inflation. Perhaps unsurprisingly, the tech-heavy Nasdaq 100 Index had its best day since November 30.
“Even a small advance in tech megacaps is going to be significant,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas. “This will be positive not only for technology investors. That will send a signal to the broader S&P.”
More clarity will come this week when investors get the latest update on inflation. A Bloomberg survey of 12 economists calls for a 6.5% jump in December’s Consumer Price Index from June’s 9.1%. A University of Michigan survey of US consumers showed that inflation expectations for the year fell last month to the lowest level since June 2021.
The S&P 500 lost 6.7% between early December and Thursday, with two stocks — Apple Inc. and Tesla Inc. – is responsible for a third of the decline, demonstrating how strong the megacaps’ hold on the wider market is.
“Ultimately, 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 six to eight months,” said Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors.
But the economic slowdown that would lead to a Fed change carries its own risks. Nikkei reported on January 2 that Apple has ordered fewer components due to lower demand for a number of products. Analysts at UBS questioned the growth prospects of Microsoft Corp’s cloud computing business, while Tesla struggled with declining sales in China.
The upcoming earnings season may change sentiment, but so far it looks bleak. According to data compiled by Bloomberg Intelligence, companies in the S&P 500 are expected to have a 2.7% decline in fourth-quarter profits. Excluding the five largest S&P 500 constituents, the number is just -0.9%.
“Investors are either dealing with uncertainty around inflation or they’re dealing with concerns about growth, and either way it’s a lose-lose situation for tech megacaps,” Zaccarelli said.
Tech giants have led the stock market bull run over the past decade. They also took advantage during the Covid-19 pandemic as investors devoured all things digital. However, this trend reversed last year when rising prices forced the central bank to fight back and cut rates to near zero. As interest rates rise and growth forecasts worsen in 2022, the so-called FAANG group — Facebook parent Meta Platforms Inc., Amazon.com Inc., Apple, Microsoft and Alphabet Inc. losing 38% of its market value, it outperformed both. Nasdaq 100 Index and S&P 500.
The tech downturn has had a major impact on the major indices. Apple, the S&P 500’s largest stocks 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. Meta and Netflix Inc. — up 3.2% for the week, Tesla and Advanced Micro Devices Inc. The broader index fell 1%, incl.
Often, no other sector is large enough to offset the movement of tech stocks. While the FAANG’s impact on the S&P 500 has diminished as the market value of giants like Apple declines, the group remains formidable. To give you an idea of how big that is: Just four tech titans — Apple, Microsoft, Alphabet and Amazon — account for about 16% of the S&P 500, which is more than the entire healthcare group, second in the index. the largest industry after technology.
“You have to be wary of tech stocks because there’s still uncertainty about whether the Fed will go above and beyond with rate hikes,” said Eric Bailey, 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.”
Most Read from Bloomberg Businessweek
©2023 Bloomberg LP