This stock market rally in the first half of 2023 was built on the back of technology stocks, as investors bet on a resilient US consumer and hype surrounding artificial intelligence to keep the shares soaring.
(Bloomberg) — This stock market rally in the first half of 2023 was built on the back of technology stocks, as investors bet on a resilient US consumer and hype surrounding artificial intelligence to keep the shares soaring.
But that support has wobbled all month, as a Federal Reserve bent on keeping rates above 5% well into next year and flagging consumer confidence triggered a selloff that just shoved tech stocks into a correction. The broader S&P 500 Index dropped 1.5% Tuesday to the lowest since June 7.
The brunt of the selling has been in tech, where the bruising stretch left the S&P 500 Information Technology Index down more than 10% from its July high. The gauge also just clocked its third 1% down session in the last five. Meanwhile, confidence among consumers fell to a four-month low, showcasing cracks in the economy’s main engine.
A hawkish Fed hasn’t been a problem for stocks for most of the year, but the market mood is souring as officials continue to signal that rates might need to stay higher for longer than investors had expected. The fear is that the central bank’s zeal to curb inflation could break the economy, which combined with a wary consumer would leave the market vulnerable to a reversal as megacap tech giants collapse.
“The worry about rising yields hasn’t dissipated — it’s become more severe, and even though tech stocks have been able to hang on, you’re starting to see the cracks,” said Quincy Krosby, chief global strategist at LPL Financial. “US consumers — a very important element of the market — are getting more worried, and it’s not what the market wants to see.”
The S&P 500 info tech index fell 1.8% on Tuesday, widening its drop from a July peak to 11%, as 10-year Treasury yields hovered near the highest level since 2007. The S&P 500 fell 1.5%.
Sentiment took a hit as Minneapolis Fed President Neel Kashkari said he supports one more rate hike this year if the economy is stronger than expected. That came hours after JPMorgan Chase & Co.’s Jamie Dimon warned that a worst-case scenario of Fed benchmark rates hitting 7% along with stagflation remains a possibility.
Once-ebullient consumers have gotten the message, as evidenced by the sharp decline in the Conference Board’s consumer confidence index. Meanwhile, a measure of consumer expectations over the next six months fell to 73.7, below the 80 level that historically signals a recession within the next year.
Personal care companies, home products stores and online marketplace names were among the biggest decliners in the S&P 500 Tuesday, leaving the index at the lowest level since June. Etsy Inc. sank 4.4%, the third-most in the index, while Estee Lauder Inc. fell 4%.
Read: US Consumer Confidence Drops to a Four-Month Low on Outlook (2)
While the global nature of technology companies shields them somewhat from domestic growth woes, they’re not immune from the impact. As anxiety about a higher-for-longer regime mounts, selling megacap growth stocks, the market’s best performers for most of this year, is increasingly becoming a source of funds for investors, according to Miller Tabak + Co. chief market strategist Matt Maley.
“Now that it has finally sunk in that rates are indeed going to stay higher for longer, (investors are) quickly becoming worried about the valuation levels of these big-cap tech stocks,” Maley said by email.
Of course, even after a 10% drop since July, the S&P 500 Information Technology Index remains up 32% in 2023, compared with an 11% gain in the S&P 500. But investors doubt that the group will resume its first-half trajectory anytime soon.
Positioning in the tech-heavy Nasdaq 100 Index is now one-sided net short at $8.1 billion, with all long positions unwound, according to Citigroup Inc. strategists.
“Part of it is profit taking, part equity market anxiety as the higher for longer rates tone really settles in here,” said Todd Sohn, managing director of ETF and technical strategy at Strategas Securities LLC.
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