The driving forces behind the late 2023 stock market rally have diminished, particularly as investors express growing uncertainty about when the Federal Reserve will implement interest rate cuts. The initial optimism surrounding the “soft landing trade,” where investors flocked to interest rate-sensitive sectors, has encountered setbacks in the early weeks of 2024. This prompts the question of what the next catalyst might be, and the answer may lie in the Technology sector (XLK). Despite recent enthusiasm for small caps and other potential beneficiaries of the Fed’s interest rate cuts, upcoming technology earnings could play a crucial role in steering the market out of its January downturn.
According to Keith Lerner, the co-chief investment officer at Truist, the significance of technology in the market is a straightforward mathematical equation. With the tech sector representing almost 30% of the S&P 500, the largest portion among the 11 sectors, and the “Magnificent Seven” tech stocks alone contributing nearly 30% of the index’s market cap, movements in these areas remain pivotal for investors in broader indexes.
Lerner highlighted the importance of tech sector earnings and its ability to sustain earnings growth, even with a potential slowdown, as vital for maintaining positive market momentum. He expressed this sentiment in an interview with Yahoo Finance on Wednesday, preceding the release of tech earnings.
On Thursday, Taiwan Semiconductor (NYSE:TSM) assumed a leading role as the chipmaker, a key supplier to companies like Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA), reported quarterly results that exceeded estimates, propelling the stock nearly 10% higher. The company’s adjusted earnings per share of $1.48 surpassed Wall Street’s expectations of $1.38. Importantly, Taiwan Semiconductor attributed its success to the influence of artificial intelligence, forecasting a 20% revenue growth in 2024 driven, in part, by AI demand.
This positive news triggered a more than 3% surge in the semiconductor index, and Nvidia (NASDAQ:NVDA), with a weighting in the S&P 500 almost as significant as the entire Energy sector, rose over 2% before trimming gains.
Simultaneously, an upgrade on Apple (NASDAQ:AAPL) stock from Bank of America, coupled with the semiconductor movement, led to a more than 3% increase in Apple shares—its best day since May. The endorsement from analyst Wamsi Mohan, who raised his rating to Buy from Neutral and increased the price target to $225 from $208, cited artificial intelligence and the new Vision Pro headset as driving factors.
The upward movements in Apple and semiconductor stocks propelled the tech-heavy Nasdaq (^IXIC) up more than 1.3% on Thursday, while the S&P 500 (^GSPC) gained nearly 1%.
This recent research from Bank of America marks a reversal in the prevailing Wall Street narrative, where analysts had turned bearish on Apple amid concerns about iPhone demand and other issues. It comes at a critical juncture ahead of Apple’s earnings release scheduled for Feb. 1.
In the coming two weeks, other tech giants are expected to report, starting with Netflix on Jan. 23. Wall Street strategists anticipate these reports to be a crucial turning point for the market.
BofA equity strategist Ohsung Kwon, commenting in early January about potential drivers for stock growth, noted that companies have cut costs throughout the earnings recession, managed margins effectively, and observed margin increases for the second consecutive quarter. Positive commentary from companies during this earnings season, combined with easing rate pressure and reduced macro uncertainty, could be bullish for equities.
At present, technology stands out as the sector ticking those boxes and leading the market averages higher.
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