(Bloomberg) - After a grueling year for technology stocks, investors have turned optimistic at the start of 2023, taking the view that the Federal Reserve may slow the pace of interest rate hikes. The first inflation reading of the year is about to put that sentiment to the test.
Tech behemoths including Apple Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. have rallied for four consecutive sessions as traders bet that the consumer price index for December will show further cooling. Amazon is leading the pack, having gained 13% this year.
Tech stocks have been market laggards since the Fed began raising rates, causing the group to shed more than $3 trillion in market value in 2022. Higher inflation and fears of an economic downturn have also weighed on the shares as consumers and businesses cut back on spending. The Fed dialed back its rate increases last month to half a percentage point from 0.75 previously, and a favorable reading Thursday could allow an even smaller hike in February.
“It’s been a fantastic start to the year for risk assets and tech very much falls in that bracket,” said Craig Erlam, senior market analyst at Oanda. “If CPI disappoints, it will no doubt be a setback but, depending on the reading, it may not be a killer blow to hopes of a 25-basis-point hike next month. The trend has become very favorable and that matters most.”
The rally in tech stocks has lifted the Nasdaq 100 Index by 4.2% this year, outpacing the 3.4% advance for the S&P 500 Index. In a sign of how investors’ appetite for risk has been revived, a basket of unprofitable tech stocks compiled by Goldman Sachs Group Inc. is up 9.1% in 2023.
Higher rates hurt shares of unprofitable and high-valuation growth companies the most, because their stocks are priced on their prospects far out in the future, with bond yields used to discount into today’s dollars the value of earnings that companies may not see for years.
Economists surveyed by Bloomberg expect core inflation — which excludes food and energy — increased 5.7% last month, slowing from 6% previously. While tech stocks are likely to stumble if inflation comes in hotter than expected, the losses may be steeper elsewhere, said Jim Dixon, a senior equity sales trader at Mirabaud Securities.
“They were all poor performers last year,” he said of the biggest tech companies. “There are other pockets — industrials, meme, etc. — that will feel the brunt of the selloff if the data isn’t positive.”
Tech Chart of the Day
The Philadelphia Stock Exchange Semiconductor Index, also known as SOX, has rallied 27% from its October closing low, outperforming the S&P 500 and Nasdaq 100 indexes handily. The benchmark indexes have risen 11% and 6.6% in the same period, respectively. The chip gauge is staging a gradual recovery after slumping 36% last year, its biggest annual drop since 2008.
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By Subrat Patnaik
