(Bloomberg) — Even if the Federal Reserve hikes interest rates and drops tech stocks, staying out of the sector will only get harder.
On one hand, there’s so much to like: The Nasdaq 100 index is now 35% cheaper than when it peaked in 2020, megacaps like Apple Inc. are still filling their coffers with cash, and the earnings outlook shows no signs of slowing significantly.
The index fell 0.8% on Thursday and is down nearly 30% so far this year.
But the Fed. The market chatter ahead of Wednesday’s monetary policy meeting was that there was a high probability of a relief rally in tech if the central bank hiked interest rates by 75 basis points as expected. Turns out it wasn’t that easy. The Nasdaq 100 fell to lows from early July, erasing most of the summer rally after striking a more hawkish tone than the Fed had hoped.
So why not do without technology until the dust settles? That’s just not an option for most institutional investors, as the industry is by far the largest in the S&P 500 Index, at nearly 27% of the benchmark. When tech stocks reverse and you miss the rally, it could spell career death.
Stock pickers therefore tend to look for “quality” companies with durable deals or stock charts. Apple Inc. is down just 13% this year. T-Mobile US Inc., cybersecurity company Palo Alto Networks Inc., and chipmaker Texas Instrument Inc. are some of the others that have also managed to beat most of their tech peers.
“Look for companies with high market share, a good moat and low risk of substitution,” said Brian Battle, commercial director at Performance Trust Capital Partners. “Microsoft makes things that people pay for. Apple sells billions of consumer products and it’s hard to replace them.”
Companies that do not have these characteristics are listed on the stock exchange. Take Meta Platforms Inc., the Facebook owner that relies on ads. It has lost 58% of its value this year. The situation is similar for Snapchat owner Snap Inc. and streaming video company Netflix Inc.
As long as real yields in the bond market continue to rise, tech stocks are likely to have yet to bottom, which argues against buying them into the Nasdaq 100. While the index’s earnings multiple has fallen sharply, it is falling from a very inflated level. But stock pickers are finding a lot to buy in the technology space.
“So it’s gotten cheaper, but it’s not cheap,” said Alec Young, chief investment strategist at Mapsignals, a quantitative research firm. “Until it feels like the Fed is able to take a pause on tightening, tech probably won’t be a leader.”
Tech chart of the day
Top Tech Stories
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(Updates to the market open)
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