Seeds of a Stock-Market Recovery Sown in Tech’s Catastrophe Week

They’ve been safety stocks, a pie-in-the-sky growth trade, and a play on fortress profit margins that have been vacuuming up cash for a decade. Now mega-cap technology names have morphed into something else: market dogs.

All things considered, that’s not the worst news for bulls.

While stocks like Meta Platforms and have been blowing up all year, something in the selloff shifted this week. Not only did they plunge as bond yields were steadily falling, but the rout occurred alongside an otherwise buoyant market, a twist that could signal investors were finding better uses for their dollars.

The view was written largely in data on fast-money speculators, which showed managers such as hedge funds beating a rapid retreat from the beaten-up growth sector. Where is the money going? Considering a democratized version of the S&P 500 just posted one of its best back-to-back weekly gains since 2009, the answer seems to be: everywhere else. 

The rotation helped extend another rally during the 2022 bear market, the seventh since January. While all previous recovery attempts ended in vain, this episode, occurring in the face of the fallout of the sturdiest firms, is encouraging to Lori Calvasina, head of US equity strategy at RBC Capital Markets.

“The market is starting to move from areas where there is still risk to be priced in and into the areas where a lot of risks have already been baked in,” Calvasina said on Bloomberg TV. “That’s what’s supposed to happen when you make a bottom.”

With the exception of Apple Inc., the Faamg bloc — also including, Microsoft Corp., Google parent Alphabet Inc. and Meta is formerly known as Facebook — saw their shares all tumbling on the first-day post earnings. Citing everything from a strong dollar to weaker demand, the once-stronghold companies are showing cracks. 

The Big Five wiped out more than $250 billion in share values this week, putting a lid on the Nasdaq 100 even when over 80% of the index’s members advanced. 

By contrast, the S&P 500 Equal Weight Index, a version that strips out the bias of market cap and treats Apple the same as Alaska Air Group Inc., climbed more than 3.5% for a second week in a row. Such a streak of big up weeks has only happened two other times since 2009, all during the post-pandemic rebound in 2020. 

In fact, the equal-weight S&P 500 beat the cap-weighted, tech-heavy Nasdaq 100 by 3.4 percentage points, the most since January. 

“We like the price action in the last couple weeks notwithstanding some negative earnings reports,” said Mike Wilson, chief US equity strategist at Morgan Stanley said on Bloomberg TV Wednesday. “We think the market will hold up and that will be another positive catalyst because if the market doesn’t go down on bad news on fundamentals, then what do you have?” 

In the view of Wilson, who was ranked the best portfolio strategist in the latest Institutional Investor survey, prevailing pessimism among money managers and the potential for peak central bank hawkishness set the stage for a rally that can last until the holiday season. 

Amid tech earnings chaos and ahead of the Federal Reserve’s policy meeting next week, professional speculators are quickly pulling back from the market. Hedge funds, which cut equity exposure to multi-year lows during the 2022 selloff, trimmed positions in both the long and short side of their books from Monday to Wednesday, unwinding risky bets at the fastest pace since March, data compiled by Goldman Sachs Group Inc.’s prime broker show. 

A continuing rotation out of tech giants is set to close a valuation gap with the rest of the S&P 500, putting the market on a more stable footing. Despite the retreat, Faamg shares were traded at 25 times earnings, above a median multiple of 19 for the other 495 stocks.

The fact that Faamg’s misery has not spilled over is likely a function of how much investors have lightened up their positions, making them less vulnerable to the selloff.  

Take hedge funds, which have accelerated their exit this year. At the start of this week, Faamg shares made up roughly 11% of their overall net exposure in single stocks, client data compiled by Goldman’s team including Vincent Lin show. That’s the lowest proportion since at least the start of 2019 and down from a peak of 18% seen in 2020.

With all its reflexivity, cross-currents, and feedback loops, the 2022 stock market has defied easy narratives. Besides evidence of a mass migration of money into value stocks, explanations for this week’s buoyancy encompass the idea that softening earnings play into the Fed’s goals for bringing down inflation, and that enough wealth destruction has occurred in equities to start curbing price excesses in the economy.

Treasury yields fell over the week amid weakening data from manufacturing to housing, with another set of yield curves inverted in a classic recession warning. 

The specter of a looming economic downdraft, however, is no trouble to equity investors willing to bid on cheap-looking stocks whose valuation can be framed as having priced in the worst outcome. 

The Russell 2000 of small-caps, for instance, rose for six straight days, notching the longest winning streak since March 2021. At its low in June, the index was trading at 16 times profits, on par with the trough multiple seen during the 2020 pandemic crash. 

To JPMorgan Chase & Co.’s sales trading team, one big fear among clients is missing out on the next big rally. To them, a dovish Fed and a lower-than-expected inflation print would more than offset any earnings weakness.  

“Most of my clients are still playing the ‘don’t blow up’ song into year-end,” Matt Reiner, an equity sales trader with JPMorgan, wrote in a note earlier this week. “That tone will change into ‘let’s take a shot if we grind a bit higher and the pain remains prevalent.”

Source By:- Bloomberg

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