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Wall Street is still banking on major tech breakouts when the Fed eases hikes

(Bloomberg) — Wall Street tech bulls are counting on the megacap industry’s shares to rally soon and jump on the S&P 500’s recovery.

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The hope is that the Federal Reserve is nearing the end of its anti-inflation campaign and that technology, the group that has suffered the most from rising interest rates, will recover. The prospect, while still not imminent, came a step closer to reality on Friday when the latest jobs report showed a slowdown in wage growth, which the Fed is looking for as a sign of progress in its fight against inflation. Perhaps unsurprisingly, the tech-heavy Nasdaq 100 had its best day since November 30.

“Even a small advance in tech megacaps will be important,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas. “That will be positive, and not just for technology investors.” That will send a signal to the broader S&P.

More clarity is likely to come this week when investors receive the latest information on inflation. A Bloomberg survey of 12 economists calls for a jump in the consumer price index of 6.5% in December, compared to the level of 9.1% in June. A survey by the US University of Michigan showed that one-year inflation expectations fell to their lowest level since June 2021 last month.

The S&P 500 lost 6.7% between early December and Thursday, with two stocks — Apple Inc. and Tesla Inc. — accounted for a third of the decline, showing just how strong tech megacaps are in power over 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 the game for at least another six to eight months,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.

But an economic slowdown that would prompt a change from the Fed carries its own risks. Apple has ordered fewer components for a number of products, given the slowdown in demand, the Nikkei reported on January 2. Analysts at UBS questioned Microsoft Corp.’s business growth prospects. in cloud computing, while Tesla struggles with declining sales in China.

The upcoming earnings season may change the mood, but for now it looks bleak. Companies in the S&P 500 are expected to post a 2.7% drop in profits in the fourth quarter, according to data compiled by Bloomberg Intelligence. Excluding the five largest S&P 500 constituents, the figure is just -0.9%.

“Investors are either dealing with uncertainty about inflation or dealing with anxiety about growth, and either way it’s a lose-lose situation for tech megacaps,” Zaccarelli said.

Tech giants have led the stock market for much of the last decade. They also dominated during the Covid-19 pandemic when investors gobbled up 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 rose and the outlook for growth worsened in 2022, the so-called FAANG group — Facebook parent Meta Platforms Inc., Amazon.com Inc., Apple, Microsoft and Alphabet Inc. — lost 38% of its market value, trailing both the Nasdaq 100 and the S&P 500.

The tech slump has put enormous pressure on the major indexes. Apple, the S&P 500’s largest stock by market value, and Tesla, the 15th-largest, were responsible for 88% of the S&P 500’s first trading-day decline in 2023. Overall, the gauge tracks four tech giants — Alphabet, Amazon, Meta and Netflix Inc . — rose 3.2% for the week, while a broader gauge that includes Tesla and Advanced Micro Devices Inc. fell by 1%.

More often than not, no other sector is big enough to offset the movement of tech stocks. And even though the FAANG’s influence on the S&P 500 is declining as giants like Apple decline in market value, the group is still huge. To give you an idea of ​​how big that is: Just four tech titans in the S&P 500 — Apple, Microsoft, Alphabet and Amazon — account for about 16%, more than the entire health care group, the index’s second-largest industry after technology.

“You have to be leery of tech stocks because there’s still uncertainty that the Fed will go above and beyond with rate hikes,” said Eric Bailey, managing director of wealth management at Steward Partners Global Advisors. “Technology will eventually have its day, but until we have more clarity on central bank policy, it’s a tough place to invest.”

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