2024-04-15 04:14:15
Don’t be afraid of interest rate cuts! The Big Seven in U.S. stocks are expected to outperform (SOPA Images/LightRocket via Gett)
What is there to be afraid of if interest rates are not cut?
Big tech stocks enjoyed a renewed surge in popularity last week, reflecting investors are returning to their old investment strategies. Thursday’s trading was a clear sign of investors showing renewed interest in growth stocks, even as another overheated inflation report cast doubt on whether the Federal Reserve will cut interest rates this year.
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Growth stocks in general tend to be more sensitive to higher interest rates, so that’s a bit of a surprise. But experts say the reasons are clear, as these companies have strong fundamentals and large cash reserves.
“Many large-cap growth stocks are flush with cash and have low debt levels, so they have lower financing needs and are less sensitive to interest rates,” said Keith Lerner, co-investment director at Truist.
Free cash flow for the tech giants Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT) and Tesla (TSLA) jumps more than $1 billion in 2023 Dollar.
These companies outperformed the market last week, with the Roundhill Magnificent Seven ETF (MAGS) ending the week in positive territory while the S&P 500 fell 1.6%. Amazon hit a record high, and Alphabet’s valuation once exceeded $2 trillion. Even Apple finally won over investors and had its best day in nearly a year.
Wall Streeters told Yahoo Finance that in a longer-term environment of higher interest rates, these companies will likely continue to outperform, at least on a relative basis.
Cameron Dawson of NewEdge Wealth said that the strong balance sheets and fundamentals of large technology companies make them “defensive” and “safe” investments, adding that there is a “good chance of being worth buying” in the event of a short-term correction. .
“Tech companies are less sensitive to the number of Fed rate cuts than other sectors and may outperform in this environment,” Lerner said.
Ryan Detrick, chief market strategist at Carson Group, said that in addition to large amounts of cash, a solid economy is also a boon to the Big Seven. So far, there is little sign that rising interest rates will slow GDP growth or corporate profits.
Detrick expects continued economic growth to “provide opportunities for these stocks, even if interest rate cuts are smaller.”
A solid economy might spur business activity and ultimately boost profits this earnings season, another expected driver for Big Tech companies in the short term. Analysts expect tech industry profits to surge 20% in the first quarter, according to Bloomberg data.
Wedbush’s Dan Ives viewed first-quarter results as a “major upward momentum.”
“We expect tech stocks to gain another 15% this year, building on a strong performance in early 2024 as the tech growth story gains further traction,” Ives wrote in a report last week.
Bottom line: Delaying a rate cut doesn’t mean tech giants are out of business. Conversely, companies with strong fundamentals can outperform and potentially become the market’s anchor despite concerns over valuations and interest rates.
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