Apple: How big tech saved Wall Street’s start to the year

(BFM Bourse) – Over the first three months of the year, the S&P 500 gained 7.5%, but this performance was mainly driven by seven technology stocks. These benefited from expectations of a less aggressive policy on the part of the US Federal Reserve and sector rotations.

The S&P 500 may well be an index with more than 500 stocks, but its performance can sometimes be misleading.

The Wall Street benchmark index recorded an increase of 7.5% in the first quarter (which has since been increased to 7.6%), which is an appreciable performance. Although the S&P 500 is behind the CAC 40 (+13% in the first quarter), the DAX 40 (+12.2%) in Frankfurt and the FTSE 100 (+8.5%) in London, it remains ahead of the Chinese clues.

Except that almost all the performance of the S&P 500 is explained by a handful of values, seven exactly. “Virtually all of the market’s gains were made by the growth mega-caps: Microsoft, Apple, Alphabet, Nvidia, Meta, Amazon and Tesla. Without these stocks, the S&P 500 would have risen only 1.4 %” in the first quarter, underlines UBS. In other words, these seven values ​​generated 80% of the rise of the S&P 500, while they represent approximately 25% of the total capitalization of the index.

In a recent article, the New York Times went all out, writing that “big tech has covered up the Wall Street crisis”.

The performances of these values ​​since the beginning of the year are, it is true, impressive: Apple wins 28.3%

, Microsoft 19.3%, Alphabet 19%, Nvidia 85.5%, Meta 77%, Tesla 32% and Amazon 23.6%. In fact, even Apple and Microsoft can influence the direction of the flagship US index between them, with their combined market capitalization of some $4.7 trillion, or around 13% of the S&P 500.

Wave of job cuts

It should be remembered that these technology stocks had suffered a lot last year from increases in key rates by the US Federal Reserve (Fed). Technology groups, growth stocks par excellence, are particularly sensitive to the rise in interest rates which weakens their valuation. However, precisely at the start of 2023, the market is beginning to see the end of the Fed’s monetary tightening.

According to data from the CME Group, investors are mostly expecting a 25 basis point (0.25 percentage point) rate hike from the US central bank at its May meeting. But this increase should be the last, according to their expectations, and could give way to several declines, while the American economy is showing increasingly visible signs of an economic slowdown.

The market’s sequence of panic on the banks, in March, reinforced this movement of expectations of a more accommodating monetary policy. With increased tensions on credit conditions, the Fed has fewer arguments to continue its rate hike cycle.

The rise in “big tech” shares is also explained by the tough decisions taken by these big names to reduce their costs and which have resulted in many job cuts. Meta, for example, announced 10,000 last month after already 11,000 in November. Microsoft decided in January to cut its workforce to the tune of 10,000 positions, a figure which reached 12,000 for Google. For Amazon, the total for 2023 is 27,000 jobs.

Even Apple, whose activity is considered less cyclical than that of its competitors, is tightening the screw. Bloomberg reported earlier this month that Apple was cutting a small number of positions in its retail sales teams, which the news agency reported as a first for the iPhone maker.

“Cost reductions continue. It’s good for margins and that’s partly why technology groups continue to progress” explained last week on CNN Business Dan Ives, the Wedbush analyst in charge of the sector.

Safe havens?

To the point that these companies can be perceived as safe havens. This was explained by Barron’s, the financial weekly cousin of the Wall Street Journal, last month.

“Some of these groups may seem quite defensive. (…) It may seem counter-intuitive given the sector’s reputation for growth, but if you play it safe and look for cash, then big tech has it in spades,” he pointed out. For example, Apple’s cash generation exceeded $110 billion last year.

The market’s enthusiasm for artificial intelligence (AI) caused by ChatGPT could also have fueled the progress of these titles. This is the case of Microsoft, which has invested billions of dollars – 10 billion according to several media – in OpenAI, the company behind ChatGPT. Or Nvidia, perceived as a potential winner of the advent of AI, with increased use of its chips in this area. The HSBC bank has also gone on the purchase this week on the stock for this reason.

Still, the trees are not climbing to the sky and the next few weeks for the S&P 500 promise to be difficult. Capital Economics, very pessimistic about the economic situation in the United States, sees the American index reaching a low of 3,500 points this year, a drop of around 15% compared to its current price. Without painting such a gloomy picture, UBS wants to be on its cautious side.

The Swiss establishment estimates that the results season in the United States – which is currently in full swing – should result in an average drop in earnings per share of between 1% and 3%. In this context, it expects a soft landing, with the S&P 500 at 3,900 points in June then 3,800 in December, i.e. respective drops of 6% and 8% compared to the current price.

To see if the publications of the quarterly results of the tech groups can contradict these forecasts. For Microsoft, Amazon, Alphabet and Meta, these accounts are released next week (and early May for Apple).