Dow rises, big tech tumbles: What’s next for stocks as investors await Fed guidance

Last week provided a tale of two markets, with gains for the Dow Jones Industrial Average putting the blue-chip gauge on track for its best October yet, while Big Tech heavyweights suffered a shellacking. Early 2000s.

“You have a drag,” Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC ( RPA ), said in a phone interview.

As for the technology sector, especially megacap names, it was a big drag on earnings performance. After all, the market was short-term oversold, while confidence was building on expectations that the Federal Reserve and other major global central banks would be less aggressive in tightening monetary policy in the future, he said.

According to: Market expectations are beginning to shift in the direction of a slower pace of rate hikes by the central bank

What’s telling is that the interest-rate-sensitive technology sector is expected to benefit from a moderation in expectations for tighter monetary policy, Suzuki said, arguing that tech stocks could be underperforming for the long term. The market has rallied over the past 12 years, with performance dampened by rising gains following the onset of the Covid-19 pandemic in 2020.

Suzuki argues that the RBA “has had a huge bubble within key parts of the stock market for over a year now”. “We think this is the process of deflating the bubble, and we think there’s still a long way to go.”

Dow DJIA,
+2.59%
On Friday, it rose almost 830 points, or 2.6%, to close at a two-month high and post a weekly gain of more than 5%. The blue-chip gauge’s October gain was 14.4% through Friday, marking its strongest monthly gain since January. 1976 And Monday’s close was its biggest October gain on record, according to Dow Jones market data.

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While it was a tough week for many of the Big Tech’s biggest beasts, the tech-heavy Nasdaq composite COMP,
-8.39%
And technology-related sectors rose sharply on Friday. The tech-heavy Nasdaq was up more than 2% for the week, while the S&P 500 SPX,
+2.46%
Up nearly 4% on the week. But the Nasdaq underperformed the Dow significantly in October, with a 5% month-to-date gain. The Nasdaq’s performance of the Dow’s 9.4 percentage points was its strongest since February 2002.

Big tech companies have lost more than $255 billion in market capitalization in the past week. Apple Inc. AAPL,
+7.56%
Having escaped the carnage, investors rallied on Friday as they appeared to be okay A composite income statement. A parade of disappointing earnings for Facebook parent Meta Platforms Inc. META’s stocks sank,
+1.29%,
Google parent Alphabet Inc. GOOG,
+4.30%

google,
+4.41%,
Amazon.com Inc. AMZN,
-6.80%
and Microsoft MSFT,
+4.02%.

Mark Hulbert: Tech Stocks Fall – You Know When to Buy Them Again

The five companies have combined to lose $3 trillion in market capitalization this year, according to Dow Jones market data.

Comment: $3 Trillion Loss: Big Tech’s Terrible Year Gets Worse

Aggressive interest rate hikes by the Fed and other major central banks have punished tech and other growth stocks more this year because their value is based on expectations for earnings and liquidity. A rise in yields on Treasurys, which are considered risk-free, raises the opportunity cost of holding riskier assets such as stocks. And the longer those expected returns stretch, the bigger the win.

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Excess liquidity – a key ingredient in any bubble – has also contributed to technical weakness, the RBA’s Suzuki said.

Now investors see a growing risk to big tech earnings from an overall slowdown in economic growth, Suzuki said.

“A lot of people think that these are secular growth stocks and are therefore immune to the ups and downs of the overall economy – empirically that’s not true when you look at the earnings history of these stocks,” he said.

While tech’s outperformance during the Covid-induced recession may have given investors the wrong impression, the sector is benefiting from unique circumstances that have seen households and businesses rely more on technology at a time when incomes are rising thanks to government fiscal stimulus. In a general recession, he said, technology profits would be more economically sensitive.

The central bank’s policy meeting will be the key event next week. While investors and economists widely expect policymakers to deliver another supersize 75 basis point, or 0.75 percentage point, rate increase when the two-day meeting ends Wednesday, expectations are growing that December could be short for Chairman Jerome Powell. .

However, all three major indexes are in bear markets, so the question for investors is whether the bounce will survive this week if Powell fails to signal a reduction in expectations for a rate hike next week.

See: Another Fed jumbo rate hike is expected next week, and then life gets tougher for Powell

Those expectations helped fuel the Dow’s big gains last week. Global economic bellwether Caterpillar Inc. CAT,
+3.39%.

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Overall, the Dow benefited because it’s “very tech-heavy in light, energy and industrials, and they’re winners,” said Art Hogan, B. Chief Market Strategist at Riley Wealth Management said MarketWatch’s Joseph Adinolfi On Friday. “The Dow has more winners embedded in it, and that’s the secret to its success.”

Meanwhile, Invesco S&P 500 Equal Weight ETF RSP outperformed,
+2.08%,
Up 5.5% for the week, the market cap-weighted SPDR S&P 500 ETF Trust SPY,
+2.38%,
While technology may be prone to higher declines, “traditional parts of the economy, including sectors that trade at lower valuations, are proving resilient as the broader markets rallied nearly two weeks ago,” said Tom Esse, founder of Sevens Report Research. , in a Friday note.

“In retrospect, this market and economy is starting to remind me of the 2000-2002 system, where extreme technical weakness weighed on the major indices, but traditional parts of the market and the economy performed well,” he wrote.

Suzuki said investors should remember that “bear markets always mean a change in leadership” and that technology may not take over when the next bull market begins.

“You can’t argue that we’ve already got a signal, and the signal says that the next cycle will be nothing like the last 12 years,” he said.

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