The technology sector has shown immense upside potential this month even amid market turmoil, ruffled by fears of inflation and higher-than-expected rate hikes due to an upbeat January jobs data and Fed minutes.
Now the remarks from the Fed Chairman Jerome Powell in its first testimony to Congress revived fears of more interest rate increases this year leading to another bloodbath in the stock market. Powell showed enough confidence in the economic and inflation outlook, signaling that the Fed could accelerate its pace of monetary tightening with four interest rate hikes this year rather than the three penciled in to keep the economy from overheating.
All these events pushed the S&P 500 and Dow Jones into the red territory for the month declining about 5% each. Meanwhile, the Nasdaq Composite Index shed a bit lower with a 4.2% decline driven by the strong tech stock fundamentals.
This is especially true as the tech sector appears fully emerged from the burst of the dot-com bubble. The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence (AI) as well as strong corporate earnings are acting as the key catalysts.
Additionally, the twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario are pushing the stocks higher. This is because tech titans hoard huge cash overseas and are poised to benefit the most from the reduced tax rates. Most of the tech companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment.
Adding to the strength is a pickup in the economy and better job prospects that are giving a solid boost to economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle. With the global economy gathering momentum, technology companies are likely to outperform and are less susceptible to interest rates or deregulation.
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