Big Tech Helps Skirt Equity Routs as Investors Pivot to Defense

Megacap technology stocks rallied to all-time highs on Tuesday, skirting a broad market selloff driven by concern that the recovery from the pandemic-induced recession has peaked.

The New York Stock Exchange’s FANG+ Index, which includes the biggest U.S.-based tech companies as well as China’s Baidu Inc. and Alibaba Group Holding Ltd., closed at a record high as it extended gains from last month’s low to more than 10%. Meanwhile, about four out of every five stocks in the S&P 500 Index, and seven out of 10 in the Nasdaq 100, fell.

“There is no sugarcoating the fact that recent economic data has fallen short of expectations, and growth expectations are being revised lower,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “We’re witnessing a reset take place at the sector level, in which investors are gravitating back toward those growth-oriented names that enjoyed leadership last year.”

Big Tech Helps Skirt Equity Routs as Investors Pivot to Defense

The tech megacaps became investor favorites during the pandemic because of their reliable earnings growth and their roles in the work-at-home era. Their renewed popularity comes as many people worry that unprecedented central bank stimulus and the corporate earnings recovery are all slowing or ending. At the same time, the spread of the Covid-19 delta variant is stoking fresh concerns.

“The number of stocks above their long-term average price has been falling since March, another indication that investors are focused on the largest of the large US stocks,” Paul Nolte, a portfolio manager at Kingsview Investment Management, wrote in a note. “The markets have shifted back toward growth and away from the ‘reopening’ trades, fearing that Covid will continue to make any economic recovery very uneven.” 

Big Tech Helps Skirt Equity Routs as Investors Pivot to Defense

Big tech stocks have been defying the midcycle transition, a period that typically might see outperformance by cyclicals and small-cap stocks, said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. But the megacaps “are behaving contrary to history as investors bank on peak operating margins being sustained at the same time that interest rates remain lower for longer,” she wrote in a note. Still, she warns, this view might be flawed and “vulnerable to disappointments that can come from many directions,” including higher taxes and tougher regulations. 

But investors have clearly grown nervous about the impact from the delta variant and the Fed’s tapering plans. Hiring data Friday badly missed estimates, the latest in a run of weak numbers landing just as enhanced U.S. unemployment benefits expire. The string of economic data has pushed Citigroup Inc.’s Economic Surprise Index for the U.S. to its lowest level of the year -- and the lowest going back to the spring of 2020. 

“Getting into big tech makes sense if you think we are beyond peak growth in the economy and the Fed keeps pushing the rate hike decision to the right,” said Mike Bailey, director of research at FBB Capital Partners. He added that tech’s valuations are starting to creep up and the group could start to hit tougher comparisons. 

All but one of the FANG+ Index’s 10 members closed at records on Tuesday, with Apple Inc. and Netflix Inc. ending at all-time highs. Those gains pushed the Nasdaq 100 into the green and kept the S&P 500 and Dow Jones Industrial Average from posting even steeper declines from last week’s near-record levels. Meanwhile, the equal-weight version of the Nasdaq 100, where megacap hegemony is reduced, fell for the first time in four sessions. 

“Investors have formed a habit of going to big tech whenever there’s risk they’re concerned about,” said Max Gokhman, chief investment officer at AlphaTrAI. “FANGs are not a panacea, but for now that is what investors are treating them as.”

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