(Bloomberg) — Wall Street tech bulls are counting on the industry’s megacap stocks to move higher before long and jump start a rebound in the S&P 500.
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The hope is that the Federal Reserve is coming close to wrapping up its inflation-fighting campaign, and that tech, the group that’s suffered the most from interest-rate hikes, will recover. The prospect, while still not imminent, came a step closer to reality Friday when the latest employment report showed a deceleration in wage growth, which the Fed is looking for as a sign of progress in its inflation battle. Perhaps not surprisingly, the tech-heavy Nasdaq 100 Index had its best day since Nov. 30. The gauge extended gains Monday, rising 1.9% as of 10:35 a.m. New York time.
“Even a small advance in technology megacaps will matter,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, Texas. “That’s going to be positive, and not only for technology investors. It will send a signal to the broader S&P.”
More clarity will likely come this week when investors get the latest update on inflation. 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 year-ahead inflation expectations fell to the lowest level since June 2021 last month.
The S&P 500 lost 6.7% between the beginning of December and Thursday, with two stocks — Apple Inc. and Tesla Inc. — responsible for a third of the decline, showcasing just how strong of a grip tech megacaps have on the broader market.
“Ultimately, if the Fed gets inflation under control, tech has a chance to be the market leader, but the Fed is still in play for at least another six to eight months,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
But an economic slowdown that would prompt a shift by the Fed carries it’s own risks, too. Apple has ordered fewer components for a number of products, given slowing demand, Nikkei reported on Jan. 2. UBS analysts questioned growth prospects of Microsoft Corp.’s cloud-computing business, while Tesla is grappling with falling sales in China.
The upcoming earnings season may turn the sentiment around, 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 show. Excluding the five-biggest S&P 500 constituents the figure stands at just -0.9%.
“Investors are either dealing with uncertainty around inflation, or they’re dealing with anxiety about growth, and in either case it’s a lose-lose situation for tech megacaps,” said Zaccarelli.
Technology giants drove the stock market’s bull run for most of the last decade. They also dominated during the Covid-19 pandemic when investors devoured anything digital. However, that trend reversed last year when rising prices forced the central bank to fight back and cut rates to near zero. As interest rates climbed and growth outlooks soured in 2022, the so-called FAAMG cohort — Facebook parent Meta Platforms Inc., Amazon.com Inc., Apple, Microsoft and Alphabet Inc. — lost 38% of its market value, trailing both the Nasdaq 100 Index and the S&P 500.
The tech downturn exerted an outsize drag on major indexes. Apple, the S&P 500’s biggest stock by market value, and Tesla, the 15th largest, were responsible for 88% of the S&P 500’s drop on the first trading day of 2023. All told, a gauge tracking four tech giants — Alphabet, Amazon, Meta and Netflix — 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 big enough to offset a move in tech stocks. And even though the influence of the mega-tech cohort on the S&P 500 is declining as giants like Apple drop in market value, the group remains huge. To give an idea of how big that is: the share of just the four tech titans in the S&P 500 — Apple, Microsoft, Alphabet and Amazon — stands at about 16%, greater than the entire health-care group, the index’s second-biggest industry after tech.
“You have to be leery of tech stocks because there’s still lingering uncertainty that the Fed will go above and beyond by hiking rates,” said Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory. “Tech will eventually have its day, but until we have more clarity on central bank policy it’s a tough place to invest.”
(Adds Nasdaq 100 Index latest pricing in paragraph 2. Corrects to FAAMG instead of FAANG in deck, paragraph 10 and second chart.)
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