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Tech Sector Thumbs Its Nose at Higher Rates

Is the fast-moving market moving too fast?

Technology stocks generally hate higher interest rates. Tech companies often need ongoing access to lots of capital to fund their operations—and higher rates mean higher borrowing costs for those businesses, of course.

Then there’s the oft-repeated advice that investors shouldn’t “fight the Fed”—meaning the time to pile into risk assets isn’t when the Fed tightens monetary policy.

So how to explain the Nasdaq 100 Index’s 9.7% gain since the Fed’s last meeting in early May (see the chart) when Chair Powell and company once again hiked the federal funds rate—a period that’s seen the yield on the 2-year Treasury note subsequently rise by 76 basis points? 

Start with rates. Hotter-than-expected inflation data of late has pushed rates higher in recent weeks. Oddly, so has a more positive development: stability in the banking sector. The lack of further bank failures putting downward pressure on growth means the job of cooling the economy once again falls primarily on the Fed’s shoulders. And indeed, messaging from the Fed on interest rates has taken on a more hawkish tone.

Meanwhile, the artificial intelligence (AI) craze has investors pouring into tech stocks in hopes of capitalizing on this fast-paced trend. Case in point: Nvidia, whose chips are used in AI programs, saw its stock rocket 24% higher in a single day last week and currently has a market cap of more than $1 trillion.

Horizon’s portfolios have adjusted according to our current market views. That said, the dizzying speed of the tech sector’s recent ascent—and the narrowness of the current market—merits some caution in our view. Consider, for example:

  • Nvidia’s performance alone represents 26% of the Nasdaq 100’s total return in May—and 78% of the S&P 500’s 1.0% return over the month.
  • Just six stocks in the Nasdaq 100 (Nvidia, Microsoft, Alphabet (Google), Amazon, Apple, and Tesla) account for 79% of the index’s recent gains.

Healthy markets experiencing growth tend not to be as concentrated as this. Moreover, stocks ignored higher rates and moved higher back in February, only to reverse course in March.

The upshot: It’s possible that higher rates may eventually put the brakes on the recent intense-yet-narrow rally. We will look for signs that major market indices may have come too far or fast.


This commentary is written by Horizon Investments’ asset management team.

Past performance is not indicative of future results.

The Dow Jones U.S. Select Dividend Index represents the U.S.’s leading stocks by dividend yield. The Nasdaq 100 Index represents 100-plus of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

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