Wall Street expects Big Tech to rise as Fed halts hikes

Tech bulls on Wall Street are counting on mega-cap industry stocks to move higher before long and start a rally in the S&P 500.

The hope is that the Federal Reserve is close to concluding its campaign to fight inflation and that technology companies, 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. inflation. Perhaps not surprisingly, the technology-heavy Nasdaq 100 Index had its best day since November 30. The gauge extended gains on Monday.

There is likely to be more clarity this week as to when investors will get the latest update on inflation. A Bloomberg survey of 12 economists indicates a 6.5% jump in the consumer price index in December, down from June’s 9.1% level. A University of Michigan survey of American consumers showed inflation expectations for the coming 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—accounting for a third of the decline, showing just how strong the influence tech stocks of mega-capitalization in the market in general.

But an economic slowdown that triggers a change from the Fed also carries its own risks. Apple has 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 perception, 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%.

The bullish trend that the tech giants had led for much of the past decade was reversed last year when rising prices forced the central bank to fight back. As interest rates rose and growth prospects worsened in 2022, the group of companies known as FAAMG (Meta Platforms Inc, Amazon.com Inc., Apple, Microsoft and Alphabet Inc.) lost 38% of their market value, behind the Nasdaq 100 and S&P 500.

The slowdown for tech companies exerted a huge drag 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 fall in the S&P 500 on the first trading day of 2023. In total, a gauge tracking four tech giants — Alphabet, Amazon, Meta and Netflix — rose a 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 big enough to offset a move in tech stocks. And while the large-cap tech group’s influence in the S&P 500 is waning as giants like Apple lose market value, the group is still huge.

To give an idea of ​​the scale of this: The share of just the four tech titans in the S&P 500 (Apple, Microsoft, Alphabet and Amazon) sits at around 16%, larger than the entire healthcare group, the second largest sector in the index after technology.