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Big Tech will outperform in a high interest rate environment: Wall Street pros

No rate cuts, no problem.

Investors are revisiting an old playbook as mega-cap tech stocks came back in favor last week. The appetite for growth returned during Thursday’s trading action, despite another hot inflation report that puts rate cuts from the Federal Reserve this year in doubt.

That was a bit of a surprise, given that growth stocks are typically more sensitive to higher interest rates. But experts say the reason why is clear: Strong fundamentals and large cash piles.

“Many of these mega cap growth stocks are flush with cash and have lower debt levels, and therefore tend to be less dependent on financing needs and less interest rate sensitive,” Truist co-chief investment officer Keith Lerner told Yahoo Finance.

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Free cash flow from Magnificent 7 members — Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla (TSLA) — jumped more than $100 billion in 2023.

Last week, the group outperformed the broader market, with the Roundhill Magnificent Seven ETF (MAGS) ending the week with gains, compared to the S&P 500’s 1.6% decline. Amazon hit an all-time high, and Alphabet’s valuation briefly crossed $2 trillion. Even Apple finally caught a bid with investors, recording its best day in nearly a year.

And Wall Street pros tell Yahoo Finance that the group will likely continue to outperform in a higher-for-longer rate environment, at least on a relative basis.

NewEdge Wealth’s Cameron Dawson said big tech’s solid balance sheets and fundamentals suggest the group is a “defensive” and “safety” play, adding that pullbacks are “likely buyable in the short-term.”

“Tech would be somewhat less sensitive to fewer Fed rate cuts compared to other sectors, and would likely outperform in such an environment,” said Lerner.

In addition to large cash piles, a resilient economy will be a boon to the Mag 7, Carson Group chief market strategist Ryan Detrick told Yahoo Finance. So far, there are few signs that higher rates are slowing GDP growth or corporate earnings.

Detrick expects continued economic growth to “offer opportunities for the group, even in the face of less rate cuts.”

A more resilient economy can stimulate business activity, and ultimately boost profits this earnings season, another expected driver of big tech in the near term. Analysts estimate the sector’s first-quarter profits to surge 20%, according to Bloomberg data.

Wedbush’s Dan Ives sees first-quarter results as a “major positive catalyst.”

“We expect tech stocks to be up another 15% for the year adding to the strong start to 2024 as now the broader tech growth story takes center stage,” Ives wrote in a note to clients last week.

To sum it up: Delayed rate cuts don't mean a downturn for tech's biggest names. Rather, those with strong fundamentals can outperform — despite valuation and rate concerns — and potentially provide stability for the broader market landscape.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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