Broader Tech Rally Hangs on Fed Getting Closer to Cutting Rate

A broad equity rally isn’t spilling over into the technology sector, where gains are still concentrated in just a few artificial intelligence winners that have become defensive plays amid an uncertain macroeconomic backdrop.

An equal-weight version of the Nasdaq 100 Index, which makes no distinction between software giant Microsoft Corp. and drugmaker Moderna Inc., has trailed its cap-weighted peer for seven consecutive weeks through Friday’s close, the longest streak of underperformance since the first week of February 2020, data compiled by Bloomberg show. Before that, a lag this consistent happened only a handful of times ever — in 2017, 2012 and 2007.

For the “equal weight, in general, to do better, we need to get a sense that the Fed is gonna cut rates,” Alec Young, chief investment strategist at Mapsignals, said.

bad breadth

Friday’s blowout jobs report threw cold water on hopes that the Federal Reserve will hand out multiple rate cuts this year. Following the print, Fed swaps no longer price in a cut before December. The S&P 500 Index and Nasdaq 100 initially dropped, but pared losses to end the week higher 1.3% and 2.5%, respectively.

“There’s a lot of macro uncertainty right now. So it’s all about bottom-up earnings visibility. And the reality is that the mega cap, Magnificent Six really provide that,” said Young, referring to the so-called Magnificent Seven excluding Tesla Inc.