The most important drivers of the stock market rally at the end of 2023 have faded.
As investors increasingly wonder when the Federal Reserve will cut interest rates, the so-called soft landing trade that sent investors flocking to interest rate-sensitive sectors has stalled at the start of 2024.
That raises the question of what the next catalyst is – and investors may need to look no further than the technology sector (XLK). Despite the recent enthusiasm for small caps and other hot stocks that could benefit from the Fed's interest rate cuts, technology gains over the next few weeks will still be crucial to pulling the market out of its January slump.
For Keith Lerner, co-chief investment officer at Truist, it's a simple mathematical equation. With the technology sector making up nearly 30% of the S&P 500, by far the largest share of all 11 sectors, and the Magnificent Seven tech stocks alone accounting for nearly 30% of the index's market cap, moves in these areas remain critically important for investors broader indices.
“Given the focus you still have, I think it's very important that technology shows the returns and is able to grow returns at a good pace even if we suffer a slowdown in growth to keep this market in to keep moving,” Lerner told Yahoo Finance on Wednesday ahead of the tech results.
Taiwan Semiconductor (TSM) took the lead on Thursday as the chipmaker, which supplies companies like Apple (APPL) and Nvidia (NVDA), reported quarterly results before the opening bell that beat estimates and sent shares up nearly 10%.
The company's adjusted earnings per share came in at $1.48, above Wall Street's expectations of $1.38. And perhaps more importantly, the chipmaker said artificial intelligence is driving its success. Taiwan Semiconductor said it expects revenue to grow 20% in 2024, partly due to AI demand.
The news sent the semiconductor index (^SOX) up more than 3%, while Nvidia (NVDA) whose weighting in the S&P 500 is almost as large as the entire energy sectorsurged over 2% before gains retreated.
The story goes on
The move in semiconductors, combined with an upgrade of Apple (AAPL) shares by Bank of America, sent the iPhone maker's shares up more than 3%, their best day since May. Analyst Wamsi Mohan changed his rating from Neutral to Buy and raised his price target to $225 from $208, citing artificial intelligence and the new Vision Pro headset as key drivers.
Stock moves in Apple and chips sent the tech-heavy Nasdaq (^IXIC) up more than 1.3% on Thursday, while the S&P 500 (^GSPC) gained nearly 1%.
BofA's investigation marked a reversal in the recent narrative on Wall Street that analysts were bearish on Apple because of questions about iPhone demand, among other things. And it comes at a critical time ahead of Apple's earnings release, scheduled for February 1.
Other tech giants are also expected to release reports in the next two weeks, starting with Netflix on January 23, and Wall Street strategists expect these reports to represent a critical time for the market.
“Companies have been cutting costs during the earnings recession,” BofA equity strategist Ohsung Kwon told Yahoo Finance in early January about what could be driving shares higher. “They managed margins. Margins increased for the second quarter in a row. So I think the momentum is to the upside, and if companies are talking more positively this earnings season as interest rate pressures and macroeconomic uncertainty have eased somewhat, then that will be bullish for stocks.”
Currently, the technology sector is the sector that meets these criteria and therefore drives up the average values.
Josh Schafer is a reporter for Yahoo Finance.
Click here for the latest stock market news and in-depth analysis, including stock-moving events
Read the latest financial and business news from Yahoo Finance