Big Tech — not the Fed — is driving the stock-market rally. Here’s what investors need to know.

microsoft, big tech — not the fed — is driving the stock-market rally. here’s what investors need to know.

Big Tech — not the Fed — is driving the stock-market rally. Here’s what investors need to know.

Big Tech, not the Federal Reserve, is still acting as a driver of the record-setting rally across U.S. equities, offering hope to some investors that the stock market could shrug off concerns about the interest-rate outlook to sustain its upward momentum.

The tech-heavy S&P 500 index and the Nasdaq Composite ended Friday with robust weekly gains after scoring multiple record closing highs last week. The S&P 500 posted its best week in over month, while the Nasdaq logged its largest weekly advance since April 26, according to FactSet data.

The rally was helped along by Apple Inc.’s nearly 8% weekly gain after the iPhone maker announced its push into artificial intelligence during its WWDC developers conference. The company also briefly surpassed Microsoft Corp. as the most valuable U.S. company.

Other megacap tech stocks also gained momentum, with the Nvidia Corp. stock up over 9% after recently completing a 10-for-1 stock split, while Microsoft Corp. stock rallied 4.4% last week. Technology Select Sector SPDR Fund logged its best weekly performance since November, according to FactSet data. 

See: Will Nvidia spur a stock-split frenzy? Why companies have been waiting longer to split.

See: Popular tech-sector ETF could see major shakeup as Apple, Microsoft and Nvidia jockey for position

The seemingly unstoppable surge of megacap technology giants leads some investors to believe Big Tech stocks have become immune to interest-rate concerns, or that the AI momentum is powerful enough to overshadow weakness in the economy.

That is an appealing scenario for the stock market, but it’s unlikely to unfold smoothly as the Fed’s battle against inflation is still far from complete, said market analysts.

Last Wednesday, the softer-than-expected U.S. May CPI data had the markets thinking that two interest-rate cuts this year were written in stone, then they were taken aback a few hours later when the Fed projected just one rate reduction before the end of 2024, down from the three cuts policymakers anticipated in their previous March projection.

But the stock market seemed unfazed. “You had two things coming out on the same day — a very low CPI print, and then a very hawkish Fed — so they offset each other to some extent,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group. “The market was OK with the idea that just one of the cuts that was anticipated for 2024 was put into 2025 instead.”

However, Wizman told MarketWatch that it takes much more than one “low-side inflation print” to get the policymakers to acknowledge that they are comfortable with the disinflationary process, so it’s still “a waiting game,” he said. “I don’t think the countdown [to rate cut] has started.”

See: Powell says Fed is ready to cut rates if inflation falls quickly

Another explanation for the resilience in the stock market is the expectation that the Fed is willing to step in to provide policy support and loosen the financial conditions whenever the economy slides to keep the markets afloat.

“They’ve [the Fed] got a lot of ammo in their arsenal to cut rates to stop quantitative tightening, so if the labor market gets shaky, or if the economy takes a turn for the wrong direction, they’ve got a lot of options to work with,” said John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors. “This is also something that can keep the market from seeing some type of big correction.”

This so-called “Fed put” is not a confirmed notion by the central bank, but it has become widely accepted by financial-market participants over the past decades. Fed Chair Jerome Powell, in his prepared remarks last Wednesday, said “if the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”

It’s worth noting that the outperformance of technology stocks was also supported by the recent decline in Treasury yields, but strategists said AI stocks are still likely to maintain their value even in an economic slowdown.

“Lower yields would still be important to keeping the tech rally alive, but to some extent, even if you get a downturn in the economy, AI stocks may not go up but I don’t think they’ll be the first to be sold,” Wizman said. “The AI story is still very much in its infancy and is going to continue.”

He added that the revenue growth for companies in the AI space is “resilient” because there will always be an investment in this space over the next three years even if there’s a downside with the U.S. economy more generally. “That’s why they [AI stocks] seem very safe from an earnings generation perspective,” Wizman said.

See: Bond market’s rally may have more room to run: ‘What a week it’s been’

Longer-term Treasury yields fell for a fourth straight session last Friday, with the ten- and 30-year rates

touching the lowest levels in more than two months. The yield on the 10-year Treasury dropped 2.7 basis points to 4.212% on Friday, retreating 21.6 basis points for the week, according to FactSet data.

Treasury yields typically reflect the markets’ assessments of the economic outlook, with higher yields on long-term government debts suggesting a more optimistic outlook and lower yields indicating a gloomier outlook.

Jay Woods, chief global strategist at Freedom Capital Markets, said the 10-year yield closing below the 4.35%-level on a weekly basis should suggest “a beginning of a near-term downtrend” for yields, and it should also bode well for small-cap stocks and other lagging non-tech stocks in the S&P 500 to catch up to the rally.

However, the breadth is not here yet, Woods told MarketWatch via phone, adding that investors are still seeing that “one pocket [of tech stocks] doing the heavy work” instead of the stock market getting “a more broad-based rally.”

See: As Nvidia soars, the stock market’s deflated laggards spark concern

Meanwhile, consumers are a significant driver of the U.S. economy, with investors also focused on the change in consumer-spending behavior for early signals of an economic slowdown. That put the release of May retail sales report in center stage for this coming holiday-shortened week, with Wednesday being a U.S. national holiday.

Consumer spending is expected to rise 0.2% in May after remaining unchanged in the prior month, according to economists polled by the Wall Street Journal. Retail sales were flat in April, as economists had expected a 0.4% increase in sales, adding to concerns that consumers had to pull back from their spending spree under the pressure of higher interest rates and sticky inflation.

“We need to see more retail data continue to deteriorate versus just a couple trends because they have been pretty sporadic,” Tyner of Aptus Capital Advisors told MarketWatch in a phone interview on Thursday.

“But if there is pressure on employment, then the consumer is going to have some issues. As long as consumers have jobs, the markets are generally pretty well supported. Following that framework will keep you from getting too bearish,” he said.

The S&P 500 advanced 1.6% last week, while the Nasdaq was up 3.2% but the Dow Jones Industrial Average slid 0.5% in the same period, according to FactSet data.

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