There is no problem even if interest rates are not cut.
Investors are rethinking old strategies as megacap tech stocks became popular again last week. Growth appetite returned during Thursday's trading action despite a hot new inflation report that cast doubt on the Federal Reserve's interest rate cuts this year.
This was a bit of a surprise, given that growth stocks are generally sensitive to rising interest rates. But experts say the reasons are clear: strong fundamentals and a lot of cash.
“Many of these large-cap growth stocks are well-capitalized and have low debt levels, so they are less dependent on their financing needs and are less dependent on interest rates,” Keith Lerner, co-chief investment officer at Trust, told Yahoo Finance. They tend to be less sensitive to it.”
Free cash flow from Magnificent 7 members Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla (TSLA) is $100. This has increased. It will reach $1 billion in 2023.
The group outperformed the broader market last week, with the Round Hill Magnificent Seven ETF (MAGS) ending the week higher, while the S&P 500 index fell 1.6%. Amazon hit an all-time high, and Alphabet's valuation at one point exceeded $2 trillion. Even Apple finally got an investor bid, marking its best day in almost a year.
And Wall Street experts told Yahoo Finance that the group is likely to continue outperforming, at least in relative terms, even in a prolonged high interest rate environment.
NewEdge Wealth's Cameron Dawson said the strong balance sheets and fundamentals of big tech companies suggested the group was focused on being “defensive” and “safe”. “There is a high possibility that it will be available for purchase in the short term,” he added.
“Technology is a little less sensitive to less Fed rate cuts than other sectors, and is likely to outperform in such an environment,” Lerner said.
Ryan Detrick, chief market strategist at Carson Group, told Yahoo Finance that in addition to a large cash pile, Mag7 will also benefit from a resilient economy. So far, there is little sign that rising interest rates will slow GDP growth or corporate profits.
Mr Detrick expects continued economic growth to provide “opportunities for the group, even if the rate cuts are small”.
A more resilient economy could stimulate business activity and ultimately boost profits this fiscal year, another expected driver for big tech in the near term. Analysts expect the sector's first-quarter profit to rise 20%, according to Bloomberg data.
Wedbush's Dan Ives sees the first-quarter results as a “huge positive catalyst.”
“On top of a strong start to 2024, we expect tech stocks to rise an additional 15% this year as the broader technology growth story now takes center stage,” Ives said in a note to clients last week. Stated.
In summary, a delay in rate cuts does not mean that big tech companies will do worse. Rather, companies with strong fundamentals can outperform despite valuation and interest rate concerns, potentially providing stability to the broader market environment.
sheena smith Anchor of Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Have a tip about a deal, merger, activist situation, or more? Email seanasmith@yahooinc.com.
Click here for the latest technology news impacting the stock market.
Read the latest financial and business news from Yahoo Finance
