Last week offered a tale of two markets, with gains for the Dow Jones Industrial Average taking the blue-chip reading to its best October ever, while big-tech heavyweights suffered a shellac that caused market veterans to catch up Remember dot-com bust in early 2000s.
“They have a tug of war,” Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), said in a phone interview.
For the technology sector, particularly the megacap names, gains were a major drag on performance. For everything else, the market was short-term oversold while optimism was building over expectations that the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy going forward, he said.
Read: Market expectations are beginning to shift towards slower rate hikes by the Fed
Tellingly, the rate-sensitive tech sector would typically benefit from a moderation in expectations of tighter monetary policy, said Suzuki, who claims tech stocks are likely to have a long period of underperforming their peers after leading the market is in over the past 12 years, a performance capped by skyrocketing gains following the outbreak of the COVID-19 pandemic in 2020.
The RBA argues that there has been “a major bubble in much of the stock market for over a year,” Suzuki said. “We think that’s the process of voiding, and we think there’s probably more to it than that.”
The Dow DJIA, +2.59%, rose nearly 830 points, or 2.6%, on Friday to end at a two-month high and post a weekly gain of more than 5%. The blue-chip indicator’s October gain was 14.4% through Friday, which would mark its strongest monthly gain since January 1976 and the biggest October gain on record, if it closes on Monday, according to Dow Jones Market Data Monday holds.
While it has been a rough week for many of the biggest big tech bigs, the tech-heavy Nasdaq Composite COMP, -8.39% and tech-related sectors rallied strongly on Friday. The tech-heavy Nasdaq was up more than 2% for the week, while the S&P 500 SPX was up nearly 4% at +2.46% for the week.
Big tech companies lost more than $255 billion in market cap over the past week. Apple Inc. AAPL, +7.56%, escaped the carnage and rallied on Friday as investors appeared to agree with a mixed earnings report. A parade of disappointing earnings saw shares in Facebook parent Meta Platforms Inc. META, +1.29%, Google parent Alphabet Inc. GOOG, +4.30%, GOOGL, +4.41%, Amazon.com Inc .AMZN, -6.80% and Microsoft MSFT, decline. +4.02%.
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Combined, the five companies have lost a combined $3 trillion in market cap this year, according to Dow Jones Market Data.
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Aggressive rate hikes by the Fed and other major central banks have penalized technology and other growth stocks the most this year, as their value is based on far-reaching expectations for earnings and cash flows. The accompanying rise in yields on Treasuries, which are considered risk-free, increases the opportunity cost of holding riskier assets like stocks. And the further that expected revenue stretches, the greater the success.
Excessive liquidity — a key component of any bubble — has also contributed to tech weakness, the RBA’s Suzuki said.
And now investors see an emerging risk to big tech’s gains from an overall slowdown in economic growth, Suzuki said.
“A lot of people have the notion that these are secular growth stocks and therefore immune to the ebb and flow of the overall economy — empirically, that’s not true at all when you look at the earnings history of these stocks,” he said.
Tech’s outperformance during the COVID-inspired recession may have given investors the wrong impression, as the sector benefited from unique circumstances that caused households and businesses to tumble at a time when incomes are falling due to government fiscal stimulus skyrocketed, were more dependent on technology. In a typical slowdown, tech earnings tend to be very economically sensitive, he said.
The Fed monetary policy meeting will be the most important event in the coming week. While investors and economists overwhelmingly expect policymakers to come up with another super-big 75 basis point, or 0.75 percentage point, rate hike when the two-day gathering ends on Wednesday, expectations are mounting for Chairman Jerome Powell, who indicates that a smaller December might be on the table .
However, all three major indices remain in bear markets, leaving investors questioning whether the rebound will survive this week unless Powell signals that expectations for next week’s rate hikes will be turned down.
See: Another Jumbo Fed rate hike is expected next week and then life will be difficult for Powell
Those expectations helped fuel the Dow’s big gains over the past week, along with solid gains from a number of components including global business leader Caterpillar Inc. CAT, +3.39%.
Overall, the Dow benefited because it’s “very technical light and very strong in energy and industrials, and those were the winners,” Art Hogan, chief markets strategist at B. Riley Wealth Management, told MarketWatch’s Joseph Adinolfi on Friday. “There’s just more winners embedded in the Dow, and that was the secret of its success.”
Meanwhile, the outperformance of the Invesco S&P 500 Equal Weight ETF RSP, +2.08%, up 5.5% over the week, versus the market cap-weighted SPDR S&P 500 ETF Trust SPY, +2.38% underscored that Technology Can Be Vulnerable “Traditional parts of the economy, including sectors trading at lower valuations, have been proving resilient to further declines since broad markets rallied nearly two weeks ago,” said Tom Essaye, founder of Sevens Report Research, in a statement Friday.
“Stepping back, this market and the broader economy reminds me of the 2000-2002 setup, when extreme technology weakness weighed on the major indices, but more traditional parts of the market and the economy fared better,” he wrote.
Suzuki said investors should remember that “bear markets always signal a change in leadership” and that means technology won’t take over when the next bull market hits.
“You can’t argue that we already have a signal and the signal tells us that the next cycle will not look like the last 12 years,” he said.