Technology stocks have tumbled into a bear market this year in anticipation of higher interest rates. With the Federal Reserve set to begin delivering on those expectations Wednesday, where the likes of Nvidia Corp. and Zscaler Inc. go from here will hinge on signals about how quickly further rate hikes might come.
The Nasdaq 100 Index, home to many of the most rate-sensitive stocks, has dropped 18% from its November peak on concerns about scaled-back stimulus, slowing economic growth and soaring inflation. Those fears have only been exacerbated by Russia’s invasion of Ukraine, though stocks are likely to get a bounce Wednesday thanks in part to a huge rally in China.
While fairly aggressive Fed tightening appears to be priced in, there is still a risk that the central bank could take a more hawkish stance, according to Keith Lerner, chief market strategist for Truist Advisory Services. A bullish outcome, by contrast, would be an acknowledgment of the war in Europe and ability to maintain some flexibility, he said.
“What the market wants to see is that Powell and the committee are not on autopilot,” he said in an interview, referring to Fed Chair Jerome Powell. “Any discussion that they’re taking into consideration what’s happening overseas would be good for the market.”
The selloff in the Nasdaq 100 has brought valuations back to pre-pandemic levels, though prices relative to future profit expectations are still above historical averages. Even with tech sector profit estimates on the rise, the drop in valuations hasn’t been enough to generate a surge in buying, with some on Wall Street saying it could be several more months before a sustained rally materializes.
In the meantime, the bond market isn’t helping. The yield on the 10-year U.S. Treasury jumped to as much as 2.20% Wednesday, the highest since 2019.
The combination of slowing economic growth and rising interest rates should benefit companies like Apple Inc. that have lots of free cash flow, according to Scott Yuschak, a senior equity strategy analyst at Truist. Still, valuations remain a sticking point.
“Our bias with rising rates favors companies with strong cash flows that won’t be affected by a decrease in liquidity,” he said. “We still like megacaps but valuations still remain a concern.”
Wednesday’s record-setting rally in Chinese and Hong Kong stocks lifted the Hang Seng Tech Index by 22%, the biggest-ever gain in the benchmark’s seven-year history. A look at the chart since the peak last year shows how far in the hole China tech remains. And short-term momentum remains negative, with the benchmark below its 14-day and 200-day moving averages.
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