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Dow rises, Big Tech falls: What’s next for stocks as investors await Fed guidance

The past week featured a tale of two markets, with gains for the Dow Jones Industrial Average putting the blue-chip gauge on track for its best October ever, while Big Tech heavyweights got a shellacking that made market veterans remember dot-com -bust in the early 2000s.

“You have a tug of war,” Dan Suzuki, deputy managing director of investments at Richard Bernstein Advisors LLC (RBA), said in a telephone interview.

For the tech sector, especially the megacap names, earnings were a big drag on performance. For everything else, the market was short-term oversold, while optimism was built on expectations that the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy in the future, he said.

Read: The market̵[ads1]7;s expectations are beginning to shift in the direction of a slower pace of interest rate increases from the Fed

Tellingly, the rate-sensitive tech sector is typically expected to benefit from a moderation in expectations for tighter monetary policy, said Suzuki, who argues that tech stocks are likely to have a long period of underperformance compared to their peers after leading the market higher the over the past 12 years, a performance limited by soaring gains following the outbreak of the COVID-19 pandemic in 2020.

The RBA has argued there was “a huge bubble in much of the stock market for over a year now,” Suzuki said. “We think this is the process of the bubble deflating, and we think there’s probably more to go.”

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 gauge’s October gain was 14.4% through Friday, which would mark the strongest monthly gain since January 1976 and the biggest October gain on record if it holds through Monday’s close, according to Dow Jones Market Data.

While it was a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite COMP,
and technology-related sectors bounced sharply on Friday. The tech-heavy Nasdaq swung to a weekly gain of more than 2%, while the S&P 500 SPX,
rose almost 4% for the week.

Big Tech companies lost more than $255 billion in market value in the past week. Apple Inc. AAPL,
escaped the carnage, rallying on Friday as investors appeared to be fine with a mixed earnings report. A parade of disappointing earnings sank shares of Facebook parent Meta Platforms Inc. META,
Google parent Alphabet Inc. GOOG,

+4.41%, Inc. AMZN,
and Microsoft MSFT,

Mark Hulbert: Tech stocks are falling – how you’ll know when to buy them again

Combined, the five companies have lost a combined $3 trillion in market value this year, according to Dow Jones Market Data.

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

Aggressive rate hikes by the Fed and other major central banks have punished technology and other growth stocks the most this year, as their value is based on expectations of earnings and cash flow far into the future. The accompanying increase in the yield on Treasurys, which are considered risk-free, increases the opportunity cost of holding riskier assets such as stocks. And the further out the expected income extends, the bigger the hit.

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

And now investors see a looming risk to Big Tech earnings from a general slowdown in economic growth, Suzuki said.

“A lot of people have the notion that these are secular growth stocks and therefore immune to the ups and downs of the overall economy — that’s not empirically true at all if you look at the history of earnings for these stocks,” he said.

Tech’s outperformance during the COVID-inspired recession may have given investors a false impression, with the sector benefiting from unique circumstances that made households and businesses more reliant on technology at a time when incomes were rising due to government fiscal stimulus. In a typical downturn, tech profits tend to be very economically sensitive, he said.

The Fed’s policy meeting will be the main event of the week ahead. While investors and economists overwhelmingly expect policymakers to deliver another 75 basis point, or 0.75 percentage point, rate hike when the two-day meeting ends on Wednesday, expectations are rising for Chairman Jerome Powell to indicate that a smaller December may be on the table. .

However, all three major indexes remain in bear markets, so the question for investors is whether the rally this week will survive if Powell fails to signal a downshift in expectations for rate hikes next week.

See: Another Fed jumbo interest rate hike is expected next week, and then life will be difficult for Powell

Those expectations helped drive the Dow’s big gains over the past week, along with solid earnings from a number of components, including global economic bellwether Caterpillar Inc. CAT,

Overall, the Dow had the advantage because it’s “very technical light, and it’s very heavy in energy and industrials, and those have been the winners,” Art Hogan, market strategist at B. Riley Wealth Management told MarketWatch’s Joseph Adinolfi on Friday. “The Dow just has more of the winners built into it, and that’s been the secret to its success.”

Meanwhile, beyond the performance of the Invesco S&P 500 Equal Weight ETF RSP,
up 5.5% on the week, compared to the market cap-weighted SPDR S&P 500 ETF Trust SPY,
emphasized that while technology may be vulnerable to more downturns, “traditional parts of the economy, including sectors that trade at a lower value, are proving resilient since the broad markets bounced back nearly two weeks ago,” said Tom Essaye, founder of the Sevens Report Research, in a Friday note.

“Stepping back, this market and the economy more broadly is starting to remind me of the 2000-2002 setup, where extreme tech weakness weighed on the major indexes, but more traditional parts of the market and the economy outperformed,” he wrote.

Suzuki said investors should remember that “bear markets always signal a change in leadership,” meaning technology won’t take the reins when the next bull market begins.

“You can’t argue that we already have a signal, and the signal says that the next cycle is not going to look anything like the last 12 years,” he said.

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