The long-awaited Fed rate cut is likely great news for the broader stock market. Unlike this summer, however, where shifts in the market saw a massive stock rotation out of mega-cap companies, this new boom is unlikely to come at the expense of the tech giants largely responsible for driving major indices to record highs.
All seven members of the so-called Magnificent Seven—a movie-inspired moniker that refers to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—saw their stocks surge along with the overall market on Thursday as the Dow closed above 42,000 for the first time. As stocks held relatively steady on Friday, Meta led the way with a 7% gain for the week.
As of Friday afternoon, however, shares of Nvidia and Tesla were down roughly 2% and 3% for the session, respectively. The Roundhill Magnificent Seven ETF was down slightly on the day but has gained 3% this week.
As many companies struggled to navigate a high inflationary environment over the last few years, America’s tech behemoths helped buoy the market. The Magnificent Seven accounted for half of the S&P 500’s total gains last year, according to a report from Morgan Stanley. Nvidia, despite a recent dip, drove roughly 30% of the index’s total returns during the first half of the year, thanks to its share price rising over 140%.
A hefty rate cut benefits Big Tech
Investors initially cheered this week when the Federal Reserve decided to lower rates for the first time in over four years as the central bank declared victory in the fight against inflation. Stocks closed in the red on Wednesday, however, pointing to fears that the half-point cut, rather than a more customary move of 25 basis points, signaled that the economy has cooled faster than the Fed anticipated.
As Coins2Day’s Alicia Adamczyk reported, declining interest rates can go hand in hand with economic downturns: Seven out of 11 periods of sustained rate cutting since 1980 have coincided with recessions, according to research by Hartford Funds.
If the Fed does fail to achieve a “soft-landing,” the Magnificent Seven can be viewed as a potential defensive play for investors. Most of the tech giants boast “fortress balance sheets,” as Baird managing director and tech desk strategist Ted Mortonson has put it, with massive free cash flows that can help serve as a bulwark against volatility caused by recession fears, election uncertainty and geopolitical risk.
“These are names that each one of us use to some capacity every single day of our lives,” Angelo Zino, a senior tech analyst at CFRA Research, told Coins2Day in July.
Of course, Fed chair Jerome Powell said he didn’t see an elevated risk of a downturn, citing declining inflation, solid growth, and a relatively strong labor market. Thursday’s rally indicates at least some investors agree, and that could be good news for stocks broadly.
“Rate-sensitive sectors, in particular, are rejoicing,” Ross Mayfield, an investment strategist at Baird Private Wealth Management, wrote in a piece Friday morning. “Sure enough,” he added, “rate-cut expectations have helped utilities and homebuilders to outperform the S&P 500 by over 10% since June 30.”
Nonetheless, a rate cut should help the big boys too. Lower interest rates historically benefit high-growth tech stocks as the present value of their future earnings increases. As Big Tech pours hundreds of billions of dollars into AI-related capital expenditures, meanwhile, cheaper borrowing costs don’t hurt, either.
In short, just because a rate cut could be good news for everybody doesn’t mean the Magnificent Seven can’t stay hot.