Last week offered a story of two markets, with gains for the Dow Jones Industrial Average putting the premier gauge on track for its best October on record while Big Tech heavyweights suffered a bombardment that reminded market veterans of the dot-com bust in the early 2000s.
“You have a tussle,” Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), said in a phone interview.
For the technology sector, especially the megacap names, earnings were a major drag on performance. For everything else, the market was oversold in the near term as optimism bolstered expectations that the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy going forward. did he declare.
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Tellingly, the interest-rate-sensitive tech sector should generally benefit from a moderation in expectations of monetary policy tightening, said Suzuki, who argues that tech stocks should see a long run. period of underperformance relative to their peers after leading the market higher for the past 12 years, a performance capped by the surge in earnings following the onset of the COVID-19 pandemic in 2020.
The RBA maintains that there has been “a major bubble in large parts of the stock market for over a year now,” Suzuki said. “We think it’s the process of deflating the bubble and we think there’s probably still a lot to do.”
The Dow
DJIA,
jumped nearly 830 points, or 2.6%, on Friday to end at a two-month high and post a weekly gain of more than 5%. The Prime Gauge’s October gain was 14.4% through Friday, which would mark its biggest monthly gain since January. 1976 and its biggest October rise on record if it holds through Monday’s close, according to Dow Jones Market Data.
While it’s been a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite
COMP,
and technology-related sectors rebounded strongly on Friday. The tech-heavy Nasdaq posted a weekly gain of more than 2%, while the S&P 500
SPX,
rose almost 4% for the week. But the Nasdaq significantly underperformed the Dow Jones in October, gaining 5% since the start of the month.
The Dow’s 9.4 percentage point outperformance against the Nasdaq so far in October is on track to be the strongest since February 2002.
Big tech companies lost more than $255 billion in market capitalization last week. Apple Inc.
AAPL,
escaped the carnage, rallying on Friday as investors seemed to agree with a report on mixed earnings. A parade of disappointing earnings sent shares of Facebook’s parent company Meta Platforms Inc. sinking.
META,
Alphabet Inc., parent company of Google.
GOOG,
GOOGL,
Amazon.com Inc.
AMZN,
and Microsoft
MSFT,
Mark Hubert: Tech stocks are falling – that’s how you’ll know when to buy them again
Together, the five companies have lost $3 trillion in market capitalization this year, according to Dow Jones Market Data.
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Aggressive interest rate hikes by the Fed and other major central banks have hurt technology and other growth stocks the most this year, as their value is based on long-term earnings and cash flow expectations. term. The concomitant rise in Treasury bond yields, which are considered risk-free, increases the opportunity cost of holding riskier assets like stocks. And the longer these expected benefits spread, the bigger the hit.
Excessive liquidity — a key ingredient of any bubble — has also contributed to tech weakness, RBA’s Suzuki said.
And now investors see emerging risk to Big Tech earnings due to an overall slowdown in economic growth, Suzuki said.
“A lot of people have the idea that these are secular growth stocks and therefore immune to the ups and downs of the overall economy – that’s not empirically true at all if you look at the earnings history of these stocks,” he said.
Tech’s outperformance during the COVID-inspired recession may have given investors the wrong impression, with the sector benefiting from unique circumstances that have seen households and businesses become more reliant on tech at a time of rising incomes. due to government fiscal stimulus. In a typical downturn, tech earnings tend to be very sensitive to the economy, he said.
The Fed’s policy meeting will be the main event for the coming week. With investors and economists overwhelmingly expecting policymakers to deliver another 75 basis point, or 0.75 percentage point, rate hike at the end of the two-day meeting on Wednesday, expectations increase for President Jerome Powell to indicate that a smaller December could be on the table. .
However, all three major indexes remain in bear markets, so the question for investors is whether this week’s rally will survive unless Powell signals a downgrade in rate hike expectations next week.
See: Another giant Fed rate hike expected next week, then life gets tough for Powell
These expectations helped propel the Dow’s strong gains over the past week, as well as strong earnings from a number of components, including Caterpillar Inc Global Economic Indicator.
CAT,
Overall, the Dow Jones benefited because it’s “very technology-light, and it’s very energy-heavy and industry-heavy, and those were the winners,” strategist Art Hogan Head of Market at B. Riley Wealth Management says Joseph Adinolfi of MarketWatch Friday. “The Dow just has more built-in winners and that’s been the secret to its success.”
Meanwhile, the outperformance of the Invesco S&P 500 Equal Weight ETF
RER,
up 5.5% on the week, versus the market-cap-weighted SPDR S&P 500 ETF Trust
TO SPY,
pointed out that while tech may be vulnerable to more declines, “traditional parts of the economy, including sectors trading at a lower valuation, have been proving resilient since major markets rebounded nearly two weeks,” said Tom Essaye, founder of Sevens Report Research. , in a Friday note.
“Standing back, this market and the economy in general are beginning to remind me of the setup of 2000-2002, where extreme weakness in technology weighed on major indices, but more traditional parts of the market and economy performed better,” he wrote.
Suzuki said investors should remember that “bear markets always signal a change in leadership” and that means technology won’t take the reins when the next bull market begins.
“You can’t argue that we already have a signal and the signal is that the next cycle will be nothing like the last 12 years,” he said.
