Tech Stocks Sink as War Jitters Fuel Rush to Bonds

Issues Facing Big Tech,  Market Rally

The continuing broadening of this year’s powerful stock market rally hangs on what the Fed does and says about interest rates after its two-day meeting wraps up on Wednesday.

Since the latest consumer price index print showed signs of cooling inflation, traders have stepped up their rotation out of Big Technology shares and into everything from small-capitalization stocks to value plays.

If the Fed is about to begin a rate reduction cycle, stock bulls have history on their side. In the six prior hiking cycles, the S&P 500 Index has risen an average 5% a year after the first cut, according to calculations by the financial research firm CFRA.

What’s more, the gains also broadened, with the small-cap Russell 2000 Index climbing 3.2% 12 months later, CFRA’s data show.

Goldman Sachs Group Inc. Chief Executive Officer David Solomon said one or two Fed rate cuts later this year are looking increasingly likely, after predicting just two months ago there would be no rate reductions in 2024.

“One or two cuts in the fall seems more likely,” Solomon said Tuesday in a CNBC interview from Paris. “There’s no question there are some shifts in consumer behavior, and the cumulative impact of what’s been kind of a long inflationary pressure, even though it’s moderating, is having an effect on consumer habits.”

The S&P 500 Index has probably already logged the gains it will see this year, but the benchmark still presents ample opportunities for investors, according to Bank of America Corp.

While neutral on the index overall, BofA’s Savita Subramanian says there’s potential for strong returns in a few areas: among dividend payers, “old school” capital-expenditure beneficiaries like infrastructure, construction and manufacturing stocks, and other themes that don’t revolve around artificial intelligence.

“In mid-2023, sentiment was deeply negative and our toolkit suggested that the direction of economic and earnings surprises was more likely positive than negative,” Subramanian, the firm’s head of U.S. equity and quantitative strategy, told clients in a note dated July 29. “Today, sentiment is neutral and positive surprises are ebbing.”

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