Gains have put the blue-chip Dow Jones Industrial Average (Dow Jones stock market) on track for its best October ever, but Big Tech heavyweights are taking a beating that is reminding market veterans of the dot-com implosion in the early 2000s.
Dan Suzuki, deputy chief investment officer of Richard Bernstein Advisors LLC (RBA), stated over the phone, “You have a tug of war.”
Earnings were a significant performance drag for the technology sector, particularly the megacap names. According to him, the market was short-term oversold for everything else as optimism grew regarding future predictions that the Federal Reserve and other significant global central banks will be less active in tightening monetary policy.
What’s telling is that the interest-rate-sensitive tech sector would typically be expected to benefit from an easing of expectations for tighter monetary policy, according to Suzuki. Suzuki believes that tech stocks are likely in for a protracted period of underperformance compared to their peers after having led the market higher over the previous 12 years, a performance that was capped by soaring gains following the onset of the COVID-19 pandemic in 2020.
According to Suzuki, RBA has been claiming that there is “a big bubble within large areas of the equity market” for more than a year. We believe that the bubble is bursting, and we believe that there is likely yet more to come.
The Dow DJIA, -0.28% increased by around 830 points, or 2.6%, on Friday, reaching a two-month high and posting a weekly gain of over 5%. According to Dow Jones Stock Market Data, the blue-chip gauge had gained 14.4% through Friday, which would be the highest monthly increase since January 1976 and the largest October climb ever if it holds through Monday’s close.
Although several of Big Tech’s largest beasts had a difficult week, the tech-heavy Nasdaq Composite COMP, -0.85% and sectors tied to technology saw a significant rebound on Friday. While the S&P 500 SPX, -0.60% surged over 4% for the week, the tech-heavy Nasdaq flipped to a weekly gain of more than 2%. With a 5% rise for the month of October, the Nasdaq is falling well short of the Dow.
The Dow is on course to have its best month of performance since February 2002 with a 9.4 percentage point lead over the Nasdaq thus far in October.
Major indices were expected to open lower on Monday according to stock-index futures, although the Dow will post its highest October ever if it maintains a monthly rise of more than 10.65%.
Big Tech businesses saw their market capitalization decline by more than $255 billion during the past week. Apple Inc. AAPL, -1.44%, a component of the Dow, managed to avoid the destruction and surge on Friday as investors seemed ok with a mixed earnings report. Shares of Google parent Alphabet Inc. GOOG and Facebook parent Meta Platforms Inc. META both fell due to a string of underwhelming earnings. Google, down 1.45%, Amazon.com, down 1.42%, and Microsoft, down 1.15 percent.
The Fed and other major central banks’ aggressive interest rate hikes have hurt tech and other growth stocks the most this year since their value is predicated on far-off expectations for earnings and cash flow. The opportunity cost of keeping riskier assets like stocks increases due to the corresponding increase in rates on Treasury bonds, which are thought of being risk-free. And the higher the hit, the further out those predicted earnings are.
According to RBA’s Suzuki, excessive liquidity, a crucial component of any bubble, has also contributed to the deterioration in the tech sector.
According to Suzuki, investors now perceive a growing threat to Big Tech profitability from a general slowdown in economic development.
According to the history of earnings for these stocks, “many people have the misconception that these are secular growth stocks and therefore immune to the ups and downs of the wider economy. That’s not empirically accurate at all,” he added.
Investors may have been misled by the technology sector’s superior performance during the COVID-inspired recession because it benefited from unusual circumstances that saw households and businesses become more dependent on technology at a time when incomes were rising as a result of government fiscal stimulus. He noted that during a typical slowdown, tech profits often become very sensitive to the economy.
The key event of the coming week will be the Fed’s policy meeting. When the two-day meeting concludes on Wednesday, investors and analysts generally anticipate policymakers to announce another massive 75 basis point, or 0.75 percentage point, rate rise. However, pressure is rising on Chairman Jerome Powell to suggest that a smaller December may be feasible.
Investors are uncertain as to whether the rally this week will hold if Powell fails to indicate a downturn in expectations for rate rises next week because all three major indexes are still in bad markets.
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