Last week provided a tale of two markets, with gains for the Dow Jones Industrial Average setting the metric on track for the best October month ever, while big tech heavyweights suffered from the crack that made market veterans recall the dot-com crash in the early 2000s.
“You have a tug of war,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), in a phone interview.
For the technology sector, particularly the big names, earnings have been a major drag on performance. For everything else, the market was in oversold territory in the short term at the same time as optimism was building above expectations that the Fed and other major global central banks would be less aggressive in tightening monetary policy going forward, he said.
Read: Market expectations begin to shift toward a slower pace of Fed rate hikes
Confirming that tech stocks are likely to continue a prolonged period of underperformance against their peers after leading the market higher over the past 12 years, said Suzuki, a performance that capped high gains after the onset of the COVID-19 pandemic in 2020.
Suzuki said the RBA has been arguing that there has been a “big bubble within key parts of the stock market for over a year now”. “We think this is the bubble deflation process and we think there’s likely to be more to go.”
The Dow DJIA,
It rose nearly 830 points, or 2.6%, on Friday to end at a two-month high and post weekly gains of more than 5%. The October gain of the blue-chip gauge was 14.4% on Friday, which would mark the strongest monthly gain since January. 1976 And its biggest October rally ever if it continues through Monday’s close, according to market data from Dow Jones.
While it has been a tough week for many of Big Tech’s biggest monsters, the high-tech Nasdaq Composite Company,
Technology-related sectors rebounded sharply on Friday. The high-tech Nasdaq swung to a weekly gain of more than 2%, while the S&P 500 SPX,
It is up nearly 4% for the week. But the Nasdaq underperformed the Dow in October, with a 5% monthly gain. The Dow Jones’ performance of 9.4 percentage points, outperforming the Nasdaq, is the strongest since February 2002.
Big tech companies lost more than $255 billion in market capitalization in the past week. Apple Inc. AAPL,
Survived the carnage, rally on Friday as investors looked fine Mixed earnings report. A parade of disappointing earnings plunged shares of Meta Platforms Inc. , affiliated with Facebook, META,
Google parent company Alphabet Inc. GOOG,
Google,
Amazon.com Inc. AMZN,
and Microsoft MSFT,
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The five companies combined have lost $3 trillion in market value this year, according to Dow Jones Market data.
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Strict interest rate increases by the Federal Reserve and other major central banks have penalized tech and other growth stocks the most this year, as their value is based on earnings and cash flow expectations far into the future. The concomitant rise in Treasury yields, which are viewed as risk-free, increases the opportunity cost of holding riskier assets such as stocks. And the more those expected profits stretch, the bigger the blow.
Excessive liquidity – a key component of any bubble – also contributed to technology weakness, said RBA’s Suzuki.
Investors now see an emerging risk to the earnings of big tech companies from a general slowdown in economic growth, Suzuki said.
“A lot of people have the idea that these are secular growth stocks, and therefore are immune to macroeconomic volatility – which is not at all true empirically if you look at the earnings history of these stocks,” he said.
Tech’s outperformance during the coronavirus-inspired recession may have given investors the wrong impression, as the sector benefited from the unique circumstances that made households and businesses more dependent on technology at a time when incomes were rising due to fiscal stimulus from the government. In a typical slowdown, he said, technical profits tend to be very sensitive from an economic standpoint.
The Fed’s policy meeting will be the main event next week. While investors and economists overwhelmingly expect policymakers to deliver another 75 basis points, or 0.75 percentage point, increase in prices when the two-day meeting ends on Wednesday, expectations are growing that Chairman Jerome Powell will suggest that a smaller December may be on the table. .
However, all three major indices are still in bear markets, so the question for investors is whether this week’s rebound will continue if Powell fails to signal a downward shift in expectations for next week’s rate hike.
This outlook helped underpin Dow Jones’ significant gains over the past week, along with solid earnings from a number of components, including Global economic leader Caterpillar Inc. cat,
Overall, the Dow Index benefited because it was “too light technically, too heavy for energy and industry, and these were the winners,” Art Hogan, chief market strategist at B. Riley Wealth Management Tell Joseph Adenolfi of MarketWatch Friday. “The Dow has more winners, and that was the secret of its success.”
Meanwhile, the superior performance of the Invesco S&P 500 Equal Weight ETF RSP,
5.5% increase on the week, versus the SPDR S&P 500 ETF Trust SPY estimated market capitalization,
He emphasized that while technology could be subject to further declines, “traditional parts of the economy, including sectors that trade at lower valuations, have proven resilient since broad markets rebounded nearly two weeks ago,” Tom said. Esai, founder of Sevens Report Research, in a note on Friday.
He wrote: “Going back, this market and the economy more broadly began to remind me of the 2000-2002 setting, where severe technological weakness affected key indicators, but traditional parts of the market and economy fared better.”
Suzuki said investors should remember that “bear markets always signal a change in leadership” and that this means technology won’t take over when the next bull market starts.
“You can’t argue that we already have a signal and that the signal is telling us that the next cycle won’t look like the last 12 years,” he said.