Wall Street Counts on Big Tech Rip Once Fed Eases

(Bloomberg) — Wall Street’s tech bulls are counting on the industry’s megacap stocks to make a long-overdue move higher and start a rebound in the S&P 500.

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The hope is that the Federal Reserve is nearing the end of its inflationary campaign, and that technology, the group hardest hit by interest-rate hikes, will recover. The hope, although still not close, came a step closer to reality when the last employment report showed a decline in wage growth, which the Fed needs as a sign of growth in inflation. Perhaps not surprisingly, the tech-heavy Nasdaq 100 index had its best day since November 30.

“Even a little growth in a technology megacap is important,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas. “This will be positive not only for technology investors. It sends a signal to the broader S&P.

More clarity could come this week when investors get the latest data on inflation. A Bloomberg survey of 12 economists called for a 6.5% jump in the consumer price index in December, down from a 9.1% jump in June. A University of Michigan survey of US consumers showed last month that inflation expectations fell to their lowest level since June 2021.

The S&P 500 lost 6.7% between December and early Thursday, led by two stocks — Apple Inc. and Tesla Inc. – responsible for the third decline, which shows how strong the grip tech megacaps are in the wider market.

“Ultimately, if the Fed controls inflation, tech has the potential 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 investment officer at independent advisor Alliance.

But the economic slowdown that drives change at the Fed has its own risks. Nikkei reported on January 2, 2008, that Apple is facing declining demand. UBS analysts are questioning growth prospects for Microsoft Corp.’s cloud computing business as Tesla faces a sales slump in China.

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

“Investors are dealing with uncertainty around inflation, or they’re dealing with concerns about growth, and in any case, that’s a risk factor for tech megacaps,” Zaccarelli said.

Tech giants drove the stock market’s bull run for most of the decade. During the Covid-19 pandemic, investors have dominated consumption of anything digital. However, that trend reversed last year when inflation forced the central bank to scramble and the rate dropped to zero. With interest rates rising and growth prospects dimming in 2022, the so-called FAMG Group — Facebook parent Meta Platforms Inc., Amazon.com Inc., Apple, Microsoft and Alphabet Inc. – has lost 38 percent of its market value, trailing both. Nasdaq 100 Index and S&P 500.

The tech crash has put an excessive drag on major indexes. Apple, the S&P 500’s largest stock 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 – up 3.2% for the week, while broader benchmarks like Tesla and Advanced Micro Devices Inc. 1% decreased.

Usually, another sector isn’t big enough to offset moves in tech stocks. And even though the mega-tech conglomerate’s influence on the S&P 500 is waning, the group still looms large as the market value of giants like Apple declines. To give you an idea of ​​how big that is: The share of the four tech titans in the S&P 500 — Apple, Microsoft, Alphabet and Amazon — is about 16%, more than the entire health care group, the index’s second-largest industry after technology.

Eric Bailey, executive director of wealth management at Steward Partners Global Advisory, said: “There’s still uncertainty about whether the Fed will go any further with hiking rates because you have to be tech stocks.” “Tech will eventually have its day, but until we have more clarity on central bank policy, it’s a tough place to invest.”

(Correct to FAAMG instead of FAANG in the deck, paragraph 10 and second chart.)

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