Tech shares were the hot play this week but investors should beware the Fed

Published Fri, Mar 17 20239:34 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Big cap tech drew in investors in droves this past week, as the market struggled against volatile interest rates and fears of banking sector contagion. The broader market was selling off early Friday, but stalwarts Apple and Microsoft were holding the week's gains. The S & P 500 was up 2.6% for the week, as of Thursday's close. But the S & P information technology sector was up 5.8%, and the communications services sector rose 7.5% in the same time frame. Strategists warn that tech and big internet names could begin to suffer again as the Federal Reserve raises interest rates or even holds them at high levels. The futures market Thursday was pricing in strong odds of a quarter-point rate hike from the Federal Reserve next week. But even though tech is vulnerable when rates rise, the dramatic fluctuations in bond yields and concerns about the financial sector pushed investors into the relative safety of big cap tech. The big cap tech names are benefiting from a flight-to-quality within the sector, since those stocks have strong cash flow and reliable earnings. The 2-year Treasury yield , for instance, rose above 5% last week but this past week it was well below 4%. The yield stood at 4.05% Friday morning. The slide in yields took some pressure off of tech. Tech and growth names have reacted poorly when rates rise, since investors tend to pay a premium for the promise of future earnings growth. Those earnings are less valuable when the cost of funding rises. MSFT GOOG 1Y line techs Apple was up 5% for the week-to-date as of Thursday, while Microsoft was up 11.1% for the week as of Thursday's close. Alphabet was higher by 10.7%, and Amazon gained 10.3% for the week, also through Thursday. "I think inflation is going to be with us for awhile," said Jeff Kleintop, chief global investment strategist at Charles Schwab. "That may prevent the central banks from declaring victory...I think that's going to keep pressure on some of these tech stocks." Strategists say the market could remain choppy, particularly if there are more negative headlines from the financial sector. Stocks were higher Thursday, as investors reacted to news about a consortium of banks agreeing to deposit $30 billion into First Republic. But banks were at the epicenter of Friday's sell-off, as traders worried there could be more contagion. Paul Hickey, co-founder of Bespoke Investment Group, said the stock market in general showed resilience in the face of banking concerns since the failure of Silicon Valley Bank one week ago. "From the bigger picture perspective, it's just another example of every headline you look at tells you, 'you should not be investing in risk assets like equities,' but they continue to hold up," Hickey said. "The market is saying one thing, and the headlines are saying another. When there's a divergence like that, we're always going to be on the side of the market." Of technology, Hickey said some of the names remain expensive, so he is selective. "As for the group, they're not cheap but they're not absurdly expensive either," he said. "Alphabet is trading at a market multiple and sentiment is pretty negative on the stock. That's a stock we like here, and it could act as a cushion for investors." But he said Microsoft is on the pricey side. "Just as Alphabet has become so out of favor on the AI play, Microsoft has become everybody's favorite on that play," he said. "I think it's got a bit ahead of itself." Kleintop said he's seeing some more outperformance in the international markets, such as Europe. In the U.S. he likes companies that are quality names with a lot of immediate cash flow.