Hopes that inflation is subsiding are fueling a surge in battered technology and megacap stocks, though some investors believe still-high valuations and doubts over the companies’ earnings outlooks may make a sustained reversal elusive.
Few believe the Fed will be swayed by a single inflation print, and past rebounds fueled by Fed-related optimism have crumbled this year after discouraging economic data or pushback from policymakers. In the coming week investors will be watching a spate of economic data, including retail sales numbers on Wednesday, for more clues on whether the Fed’s monetary policy tightening is cooling the economy.
“The trade at quite a premium to the S&P,” said Andrew Slimmon, U.S. equity portfolio manager at Morgan Stanley Investment Management. “There are a series of stocks that will do much better than the megacaps because they have re-rated significantly lower.” Still, some investors are considering increasing their positions in tech and megacap stocks if further evidence of easing inflation presents itself.
King Lip, chief strategist at Baker Avenue Asset Management, described Thursday’s CPI news - with the annual increase below 8% for the first time in eight months - as a “big deal.” If bond yields continue to fall, “the pace at which people are reducing their exposure to these large-cap tech names is going to slow down,” he added.
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