Mega Technology Stocks Back on Top as Fed Inaction Lifts S&P 500

(Bloomberg) -- Big technology is reasserting its dominance.

Computer and software stocks in the megacap realm keep vaulting to records at a rate not seen since before the dot-com bubble. In many cases, they’re the same companies everyone despised at the start of the year -- 2015 stalwarts like Alphabet Inc. and Amazon.com Inc. that tumbled in January and February. Ever since Britain’s vote to leave the European Union sent markets reeling, it’s been technology shares leading the way back.

All 11 main industries in the S&P 500 Index rallied Thursday, pushing the benchmark up 0.7 percent to 2,177.18 as of 4 p.m. in New York, the highest in two weeks. The technology-heavy Nasdaq 100 Index added 0.8 percent to close at a record for a second day.

While the Federal Reserve’s decision yesterday to leave interest rates unchanged is lifting the broader market, optimism about fourth-quarter earnings is giving technology companies an extra boost, according to Alan Gayle, a senior strategist at RidgeWorth Investments in Atlanta. Profits will rise 5.6 percent in the October-December period, according to analysts surveyed by Bloomberg. That’s up from last month’s estimate of 4.8 percent and compares with predictions for a decline in S&P 500 income.

“Technology is an easy place to invest in if you’re playing a turnaround in corporate profits and potential turn in capital spending,” Gayle said. “If you think we’ve gone through the worst of the profits downturn, which most people believe, the first beneficiary is likely to be technology.”

The Nasdaq 100 marked its 12th closing record of 2016, the most since 2000, data from Strategas Research Partners LLC show. Within the broader equity index, technology companies are the biggest contributors to gains this year. Since the Brexit vote in late June, Apple Inc., Microsoft Corp., Facebook Inc. and Google parent Alphabet count for more than a quarter of the S&P 500’s advance.

Investors added $312 million to the SPDR Technology Select Sector ETF over the five days through Wednesday, making it the sixth most popular equity exchange-traded fund. It closed at its highest level since 2000 after rising 1.7 percent over the last two sessions. Boosting the tech group today, Red Hat Inc. jumped 3.9 percent today, its best gain in six months, after reporting quarterly profit and sales that exceeded analysts’ estimates. Alphabet climbed 1.4 percent to a record.

Equities erased losses for the month Thursday, led by phone companies and those that benefit from a weaker dollar, including industrials and consumer-staples firms. A gauge of the U.S. currency fell for the third time in four days. Banks lagged amid speculation that persistently low rates will continue to weigh on profits.

The S&P 500 climbed back above its average price during the past 50 days for the first time in almost two weeks. The Dow Jones Industrial Average gained 98.76 points, or 0.5 percent, to 18,392.46, after rising as much as 156 points. The CBOE Volatility Index sank 9.6 percent to a three-week low. About 6.8 billion shares traded hands on U.S. exchanges, in line with the three-month average.

“It’s a bit of a relief rally,” Chris Gaffney, president of world markets at St. Louis-based EverBank, said by phone. “Central banks, their mantra is ‘do no wrong’ right now. They really delivered exactly what markets expected. Now we are onto the next piece of uncertainty, which is third quarter earnings and of course, the election.”

The Fed opted to wait for further evidence of stronger inflation and less slack in the labor market before raising rates, even as the economy showed signs of improving. It also scaled back the number of increases it expects in 2017. Three officials -- the most since December 2014 -- voted against Wednesday’s decision, up from one at the last meeting. Traders are pricing in a 57 percent chance of a hike in December.

The Fed statement soothed markets after worries that central bankers are less willing to boost stimulus measures had earlier this month spurred the biggest selloff since the U.K.’s secession vote in June. The decision came after the Bank of Japan tweaked its monetary policy, giving officials scope to keep loosening while limiting the negative impact on bank earnings. The S&P 500 on Thursday capped its first three-day advance in seven weeks.

To the biggest bull on Wall Street, the Fed’s restraint is one more reason that U.S. stocks are on their way to record highs. Thomas Lee, managing partner and co-founder of Fundstrat Global Advisors, has the highest year-end target for the S&P 500 among 19 strategists surveyed by Bloomberg. His forecast level of 2,325 implies a 6.8 percent gain from today’s close.

With the Fed moving off center stage for now, investors will turn their attention to economic data, and another earnings season that gets underway in about three weeks. A report today showed filings for unemployment benefits dropped last week to match the lowest level since April.

Separate data showed sales of previously owned homes unexpectedly declined to a six-month low in August, signaling buyers are getting discouraged by a lack of properties to choose from. A Bloomberg gauge tracking the degree to which data miss or exceed economists’ estimates has been negative for all of September.

To contact the reporter on this story: Dani Burger in New York at dburger7@bloomberg.net. To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, John Shipman