Why tech stocks are having a scorching-hot week of gains as banks keep failing
- Tech stocks surged 6% this week as investors cheered their limited exposure to the banking sector.
- In fact, the bank crisis helped sparked the rally in tech thanks to a precipitous drop in interest rates.
- Here’s why the tech sector benefited from the biggest bank failure since 2008.
The tech sector isn’t sweating the collapse of Silicon Valley Bank.
Tech stocks not only brushed off the event, the sector actually surged this week as the broader market flailed. That was seen in the Nasdaq 100’s near-6% surge for the week, far outpacing the S&P 500’s 1% gain and the Dow Jones Industrial Average’s slight decline as the Federal Reserve, US Treasury, the FDIC, and a consortium of mega-cap banks stepped in to prevent a cascading bank run on uninsured deposits.
“We believe many generalist investors that were hiding out in financial stocks and the overall banking sector are now seeing a much more white knuckle environment not knowing what news will come out on a Sunday night and which bank is under distress,” Wedbush analyst Dan Ives said in a recent note.
“While it sounds like [a] Twilight Zone comment to many investors, tech stocks have become the new safety trade with big tech names a major beneficiary of this dynamic.”
It became clear that investors flipped the switch in favor of technology stocks early in the week, when mega-caps like Microsoft, Amazon, and Apple soared despite the S&P 500 trading flat. Microsoft and Alphabet are poised to close the week up 12%, while Amazon and Apple are up 8% and 4%, respectively.
The gains have been so strong that the technology sector is on the verge of erasing all of its underperformance seen in 2022.
Why is this happening?
Investors appreciate that profitable tech companies have limited exposure to the financial sector, have an immense war chest of cash, and benefit from fast-growing secular trends like artificial intelligence, which won’t be slowed by a bank crisis.
Many cautious investors traditionally viewed bank stocks as safe havens in times of uncertainty given their relatively cheap valuations, while tech stocks were seen as the risky bet due to their higher valuations.
But that dynamic has been completely flipped. The past week has not only seen fall of SVB, Signature Bank, and Silvergate Bank, but also a massive rescue effort from mega-cap banks that stepped in to boost deposits at struggling First Republic Bank.
Also helping tech stocks this week was news that the Biden administration would push TikTok to be sold or be banned entirely if the popular video app’s Chinese owner don’t exit their stakes. Shares of Meta were up 4% on the news Thursday, while Snap and Pinterest shares were up 4% and 7% respectively.
But perhaps the strongest driver of technology stocks’ returns over the past week is the sharp decline in bond yields and expectations that the Fed will cut benchmark rates multiple times by the end of the year as it deals with the fallout from largest bank failure since 2008.
Tech stocks are highly sensitive to directional moves in borrowing costs, with any spike in rates often hurting high-growth names.
Before the onset of the Silicon Valley Bank implosion, the market expected the fed funds rate to end 2023 at about 5.5%. Today, that expectation has plunged to just 3.75%. And with the current fed funds rate at about 4.5%, the market is pricing in at least three 25-basis-point rate cuts before year end.
“In a mere week, [we went from] 4.5 [interest rate] hikes to ~4 cuts,” Fundstrat’s head of research, Tom Lee, told clients in a webinar on Thursday, adding that mega-cap tech stocks represent a good buying opportunity.
With the Nasdaq on track for its strongest week of performance since November, the gains could continue as investors adapt to a world where banks face more regulatory scrutiny and heightened uncertainty.