No rate cuts, no problem.
Investors are revisiting an old playbook as mega-cap technology stocks returned to favor last week. Appetite for growth returned during Thursday’s trading despite another red-hot inflation report that casts doubt on the Federal Reserve’s rate cuts this year.
This came as a surprise, given that growth stocks are typically more sensitive to higher interest rates. But experts say the reason is clear: solid fundamentals and big piles of cash.
“Many of these mega-cap growth stocks are flush with cash and have lower debt levels and therefore tend to be less dependent on financing needs and less sensitive to interest rates,” said co-chief investment officer at Truist, Keith Lerner, to Yahoo Finance.
The free cash flow of Magnificent 7 members – Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT) and Tesla (TSLA) – jumped the most of US$ 100 billion in 2023.
Last week, the group outperformed the broader market, with the Roundhill Magnificent Seven ETF (MAGS) ending the week with gains, compared to the S&P 500’s 1.6% drop. history and Alphabet’s valuation briefly surpassed $2 trillion. Even Apple finally got an offer from investors, recording its best day in almost a year.
And Wall Street professionals tell Yahoo Finance that the group will likely continue to outperform in a higher rate environment for longer, at least on a relative basis.
NewEdge Wealth’s Cameron Dawson said the big tech companies’ strong balance sheets and fundamentals suggest the group is a “defensive” and “safe” play, adding that pullbacks are “likely buyable in the near term.”
“Technology would be somewhat less sensitive to fewer Fed rate cuts compared to other sectors and would likely outperform in such an environment,” Lerner said.
In addition to big piles of cash, a resilient economy will be a boon for Mag 7, Carson Group chief market strategist Ryan Detrick told Yahoo Finance. So far, there are few signs that higher rates are slowing GDP growth or corporate profits.
Detrick expects continued economic growth to “offer opportunities for the group, even in the face of fewer rate cuts.”
A more resilient economy could stimulate business activity and ultimately increase profits in this profit season, another expected driver of big tech in the near term. Analysts estimate that the sector’s profits in the first quarter will increase by 20%, according to data from Bloomberg.
Wedbush’s Dan Ives sees the first quarter results as a “huge positive catalyst.”
“We expect technology stocks to rise another 15% for the year, adding to the strong start to 2024, as the broader technology growth story now takes center stage,” Ives wrote in a note to clients last week .
Bottom line: Late rate cuts don’t mean a slowdown for tech’s biggest names. Instead, those with strong fundamentals can outperform – despite valuation and rate concerns – and potentially provide stability to the broader market picture.
Sean Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on business, mergers, activist situations or anything else? Email seanasmith@yahooinc.com.
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