October 31, 2022
They’ve been safety stocks, a pie-in-the-sky growth trade, and a play on fortress profit margins that has been vacuuming up cash for a decade. Now megacap technology names have morphed into something else: market dogs.
All things considered, that’s not the worst news for bulls.
While stocks like Meta Platforms and Amazon.com have been blowing up all year, something in the selloff shifted this week. Not only did they plunge as bond yields were steadily falling, but the rout occurred alongside an otherwise buoyant market, a twist that could signal investors were finding better uses for their dollars.
The view was written large in data on fast-money speculators, which showed managers such as hedge funds beating a rapid retreat from the beaten-up growth sector. Where is the money going? Considering a democratized version of the S&P 500 just posted one of its best back-to-back weekly gains since 2009, the answer seems to be: everywhere else.
The rotation helped extend another rally during the 2022 bear market, the seventh since January. While all previous recovery attempts ended in vain, this episode, occurring in the face of the fallout of the sturdiest firms, is encouraging to Lori Calvasina, head of US equity strategy at RBC Capital Markets.
“The market is starting to move from areas where there is still risk to be priced in and into the areas where a lot of risks have already been baked in,” Calvasina said on Bloomberg TV. “That’s what’s supposed to happen when you make a bottom.”
With the exception of Apple Inc., the Faamg bloc — also including Amazon.com, Microsoft Corp., Google parent Alphabet Inc. and Meta formerly known as Facebook — saw their shares all tumbling on the first day post earnings. Citing everything from a strong dollar to weaker demand, the once-stronghold companies are showing cracks.
The Big Five wiped out more than $250 billion in share values this week, putting a lid on the Nasdaq 100 even when over 80% of the index’s members advanced.
By contrast, the S&P 500 Equal Weight Index, a version that strips out the bias of market cap and treats Apple the same as Alaska Air Group Inc., climbed more than 3.5% for a second week in a row. Such a streak of big up weeks has only happened two other times since 2009, all during the post-pandemic rebound in 2020.
In fact, the equal-weight S&P 500 beat the cap-weighted, tech-heavy Nasdaq 100 by 3.4 percentage points, the most since January.
“We like the price action in the last couple weeks notwithstanding some negative earnings reports,” said Mike Wilson, chief US equity strategist at Morgan Stanley said on Bloomberg TV Wednesday. “We think the market will hold up and that will be another positive catalyst because if the market doesn’t go down on bad news on fundamentals, then what do you have?”
In the view of Wilson, who was ranked the best portfolio strategist in the latest Institutional Investor survey, prevailing pessimism among money managers and the potential for peak central bank hawkishness set the stage for a rally that can last until the holiday season.
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