Stocks Reach New Highs Amid Splintering Big-Tech Trade
Despite a splintering big-tech trade, stocks surged to new highs this week, fueled by positive economic data and strong earnings reports from Meta Platforms and Amazon.com. However, the easy buy-and-hold trade on the tech giants, known as the Magnificent Seven, is now facing uncertainty.
The Nasdaq 100 recorded its 13th gain in 14 weeks, but the reaction to earnings results from the five major tech companies was divided. Two of the firms saw their stocks rise post-earnings, while three experienced declines, breaking the typical rally pattern that has been driven by optimism in artificial intelligence since early 2023.
While faced with tough news, such as Federal Reserve Chair Jerome Powell downplaying hopes of early interest-rate cuts and the collapse of New York Community Bancorp Inc., the S&P 500 managed to reach a fresh all-time high. This resilience suggests that a recession might be avoided, according to Greg Martin, co-founder at Rainmaker Securities.
Despite market reactions being mixed, economic reports showed gains in consumer confidence, construction spending, and hiring. Additionally, the five tech giants reported robust sales and earnings growth, with quarterly revenue rising by an average of 15% and totaling nearly half a trillion dollars.
The S&P 500 gained 1.4% over five days, marking its fourth consecutive weekly gain and erasing January’s losses to end the month in positive territory. Both the Nasdaq 100 and Dow Jones Industrial Average also advanced, contributing to a three-month rally that added over $8 trillion in total equity values.
Although there is a sense of comfort for tech faithfuls due to the market’s resilience to poor earnings reactions, some strategists are sounding the alarm. They draw parallels between today’s concentration of big tech companies and the dot-com bubble two decades ago, cautioning that their rapid gains may not be sustainable. Big Tech has surged 80% in the past year, while the average S&P 500 stock has only increased by 3%.
Nevertheless, analysts estimate that the dominant position of these tech giants will justify their high valuations. With expectations of 14% average annual profit growth in the next three to five years, compared to the forecast growth rate for the S&P 500, the profit trajectory of the Magnificent Seven suggests their continued supremacy.
Overall, despite the splintering big-tech trade, the stock market reached new heights supported by positive economic data and strong tech earnings. The market’s resilience to poor earnings reactions is comforting to some, but cautionary voices warn of unsustainable gains reminiscent of the dot-com bubble.
