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In the Run-up to the Fed, Big Tech Gets Crushed, Bonds Gain

January 31, 2024
minute read

Wall Street traders, anticipating the Federal Reserve decision, grappled with a series of factors including a selloff in major tech stocks, Treasury refunding plans, and economic data that fell short of expectations. Even concerns about regional lenders emerged during Wednesday's trading session, though banks rebounded from session lows.

The most influential group in the S&P 500, the technology sector, faced significant losses on Wednesday. Notably, leading companies like Microsoft Corp., Alphabet Inc., and Advanced Micro Devices Inc., which played a pivotal role in the market rally, disappointed investors who had high expectations regarding artificial intelligence (AI) breakthroughs. Despite a decline in bond yields, the tech sector struggled to gain traction.

Goldman Sachs Group Inc.'s Chief Global Equity Strategist, Peter Oppenheimer, noted on Bloomberg Television, "These are good numbers, but the expectations were huge and there is a real issue of traveling and arriving." While these companies exhibited fantastic revenue growth and a strong position, the market upside in the short term appeared limited due to excessively high expectations.

The Nasdaq 100 experienced a 1.5% decline, and the S&P 500 retraced some of its January gains. The KBW Bank Index initially slid as much as 1.5% but managed to recover losses, ending down 0.2%. Regional banks, after a more than 3.5% drop triggered by New York Community Bancorp's unexpected loss, pared their losses by more than half. Meanwhile, Treasury two-year yields dropped 12 basis points to 4.2%, and 10-year bond yields fell below 4%. The dollar also retreated.

As the Federal Open Market Committee (FOMC) concluded its two-day policy meeting, the central bank was expected to maintain rates within a range of 5.25% to 5.5%, a 22-year high initially reached in July. The rate decision and statement were scheduled for release at 2 p.m. in Washington, followed by a press conference by Chair Jerome Powell 30 minutes later.

Investors speculated about a 40% chance that the central bank might lower rates in March, approximately eight months after the last rate hike. However, most Fed officials maintained it was premature to discuss such a shift. Powell could express satisfaction with recent declines in inflation while emphasizing little urgency to cut rates, citing a robust labor market and a growing economy.

Solita Marcelli at UBS Global Wealth Management expressed a cautious view, stating, "In our view, the market is still too optimistic about the timing and pace of easing. Given the potential for disappointment on the outlook for Fed policy, we advise investors to brace for further volatility ahead."

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Cathy Hills
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