Last week delivered a tale of two markets, with gains in the Dow Jones Industrial Average putting the blue-chip gauge on track for its best October while the Big’s heavyweights Tech suffered a shelling that reminded market veterans of the dot-com bust in the early 2000s.
“You’re stuck in a fight,” said Dan Suzuki, vice president of investments at Richard Bernstein Advisors LLC (RBA).
For the tech sector, especially megacap names, earnings are a major drag on performance. For everything else, the market is oversold in the short term while optimism is building against expectations the Federal Reserve and other major global central banks will be less aggressive in the short term. future tightening of monetary policy, he said.
Read: Market expectations begin to shift towards a slower rate of Fed rate hikes
What’s being said is that the interest rate-sensitive tech sector is generally expected to benefit from adjusting to expectations of tighter monetary policy, said Suzuki, who thinks tech stocks are likely to benefit. Long-term underperformance relative to peers after higher market leadership over the past 12 years, performance capped by spikes following the onset of the COVID-19 pandemic 2020.
The RBA has argued that there has been “a large bubble in major parts of the stock market for over a year now,” Suzuki said. “We think this is the process of the bubble deflation and we think there is probably more to go.”
Dow
DJIA,
rose nearly 830 points, or 2.6%, on Friday to end at a two-month high and record a weekly gain of more than 5%. Blue-chip October’s gain is 14.4% through Friday, which would be the strongest monthly gain since January 1976 and its October record gain if it holds through Monday, according to Dow Jones Market Data.
While it’s been a rough week for many of Big Tech’s biggest beasts, the Nasdaq Composite is tech-heavy
COMP,
and technology-related sectors surged on Friday. The tech-heavy Nasdaq posted a weekly gain of more than 2%, while the S&P 500
SPX,
up nearly 4% for the week.
Big Tech companies have lost more than $255 billion in market capitalization in the past week. Apple Inc.
AAPL,
escape the carnage, rallying on Friday as investors appear to be okay with a mixed income statement. A disappointing earnings march has sunk shares of Facebook parent company Meta Platforms Inc.
META,
Google’s parent company is Alphabet Inc.
GOOG,
GOOGL,
Amazon.com Inc.
AMZN,
and Microsoft
MSFT,
Mark Hulbert: Tech stocks fall – here’s how you know when to buy back
Together, the five companies have lost a combined $3 trillion in market capitalization this year, according to Dow Jones Market Data.
Idea: $3 trillion loss: Big Tech’s terrible year is getting worse
The rapid rate hikes by the Fed and other major central banks have punished tech and other growth stocks the most this year, as their value is based on earnings and cash flow expectations. Future. The increase in the accompanying yield on Treasuries, which are considered risk-free, increases the opportunity cost of holding riskier assets like stocks. And the longer the expected earnings last, the greater the impact.
RBA’s Suzuki says excessive liquidity – a key ingredient in any bubble – is also to blame for the weakness in technology.
And now, investors see an emerging risk to Big Tech’s earnings from an overall slowdown in economic growth, Suzuki said.
“Many people have the notion that these are secular growth stocks and therefore immune to the ups and downs of the economy as a whole – that’s just not true if you look at the earnings history of these stocks. this,” he said.
Tech’s good performance during the COVID-induced downturn may have misrepresented investors, with the sector benefiting from exceptional circumstances that have seen households and businesses are increasingly dependent on technology at a time of rising incomes due to government fiscal stimulus. During a typical recession, tech profits tend to be very sensitive economically, he said.
The Fed’s policy meeting will be the main event next week. While investors and economists fully expect policymakers to deliver another super-massive rate hike of 75 basis points, or 0.75 percentage points, at the two-month meeting. end of the day on Wednesday, Chairman Jerome Powell is expected to see a smaller December looming across the board.
However, all three major indexes are still in a bear market, so the question for investors is whether this week’s rally will survive if Powell does not signal a drop in expectations. rate hike next week.
See: Another huge Fed rate hike expected next week and then life gets tough for Powell
Those expectations helped fuel the Dow’s big gains over the past week, along with steady earnings from a number of components, including global economy bellwether Caterpillar Inc.
CAT,
Overall, the Dow benefits because it’s “very light on technology, and very heavy on energy and industry, and these guys have been winners,” said Art Hogan, chief market strategist at B. Riley Wealth Management. told Joseph Adinolfi of MarketWatch on Friday. “The Dow has more winners attached to it and that is the secret to its success.”
Meanwhile, better performance of Invesco S&P 500 Equal Weight ETF
RSP,
up 5.5% for the week, versus the market cap SPDR S&P 500 ETF Trust
SPY,
emphasized that while technology may be more vulnerable to a downturn, “traditional parts of the economy, including sectors that trade with lower valuations, are demonstrating resilience since then.” since the broad market rebounded almost two weeks ago,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.
Taking a step back, this market and the economy at large are starting to remind me of the 2000-2002 setup, where technological weakness weighed on major indices, but traditional parts, he wrote. more uniformity of markets and a better performing economy”.
Suzuki said investors should remember that “bear markets always signal a change of leadership” and that means the technology won’t take over when the next bull market kicks in.
“You can’t argue that we’ve got a signal and a signal that the next cycle won’t be the same as the last 12 years,” he said.
