Wall Street’s major indexes rose on Friday as inflation data fuelled speculation that the US Federal Reserve will begin cutting interest rates in September.
Investors also returned to Big Tech stocks that recorded a broad sell-off earlier in the week.
While Big Tech has enjoyed big gains this year, the concentration risk has become evident after a disappointing start of the megacap earnings season, especially from Tesla and Google parent Alphabet this week.
On Friday, the S&P 500 gained 1.11 per cent, while the Nasdaq Composite climbed 1.03 per cent. The Dow Jones Industrial Average rose 1.64 per cent.
For the week, the Dow gained 0.75 per cent, while the S&P 500 declined 0.82 per cent and the Nasdaq dropped 2.08 per cent.
Treasury 10-year yields dropped five basis points to 4.19 per cent.
“The Big Tech stocks that have been rallying relentlessly since the beginning of 2023 are hit hard by rapid outflows as worries regarding artificial intelligence spending and the realisation that it may take time to see the benefits of this massive spending push investors to take a part of their profits and walk away,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“They are walking towards Treasuries and government bonds with the expectation that the Fed and other central banks will either start or continue cutting their rates, and walk away towards the smaller and cyclical pockets of the equity markets.”
The Fed is likely to signal next week its plans to cut interest rates in September, according to economists surveyed by Bloomberg News, a move they say will kick off reductions each quarter through 2025.
Nearly three-quarters of respondents said the US central bank will use the gathering to set the stage for a quarter-point cut at the following meeting in September.
Apple, Microsoft, Amazon and Meta Platforms are all due to report earnings next week.
Shares in five members of the so-called Magnificent Seven rose on Friday, led by Meta Platforms, which climbed 2.7 per cent.
The two exceptions were Tesla and Alphabet, whose lacklustre earnings had triggered Wednesday's big market sell-off. They both fell 0.2 per cent, with Alphabet dropping to its lowest close since May 2.
With further Magnificent Seven earnings due next week, the immediate outlook for markets may depend on what type of results these companies deliver.
The optimism over impending rate cuts is pushing investors away from the perceived safety of tech megacaps.
The rotation involves moving out of a set of high-momentum stocks, whose valuations now appear inflated, to underperforming sectors like mid- and small-cap stocks.
The small-cap Russell 2000 scored its third straight weekly gain in two months and its best three-week run since August 2022.
The rotation into economically sensitive shares has been fuelled by Fed-friendly data. Financial, industrial and staples shares have largely beaten tech in July.
Small caps have rallied 10 per cent on bets they would do better amid lower rates given their higher debt loads.
The Fed’s preferred measure of underlying US inflation, the core personal consumption expenditures price index, rose at a tame pace in June and spending remained healthy.
“The recent dip in Big Tech stock prices should be seen as a temporary setback rather than a reflection of their long-term potential,” said Nigel Green, chief executive of financial advisory and asset manager deVere Group.
“Investors need to recognise that the current market volatility is partly due to profit-taking.
“After a significant run-up in stock prices driven by AI enthusiasm, it is natural for some investors to lock in gains, especially when earnings do not exceed expectations by a wide margin.
“However, this profit-taking phase is likely to be short-lived. The fundamental drivers of growth for these tech giants remain intact.”
Long-term investors should use this period of volatility to accumulate shares of fundamentally strong companies at attractive prices, Mr Green suggested.
