Daily Brief - Defying the Fed

TLDR: Traders are ignoring the age-old Wall Street advice to "never fight the Fed," and it might just lead to a rally in some overlooked sectors of the stock market.

Despite the Fed's warnings that interest rates will remain higher for longer, investors are pouring cash into stocks that thrive on lower borrowing costs. This week, the tech sector saw inflows of $2.1 billion, the most since March, according to EPFR Global and Bank of America.

Fund managers are upping their stakes in tech stocks, driving the Nasdaq 100 Index up 17% in 2024. The top seven companies in the S&P 500 are now trading at an average of 36 times projected profits, compared to the benchmark’s multiple of 22, Bloomberg data shows.

Equity positioning has hit its highest level since November 2021, driven by both rules-based and discretionary investors, who significantly increased their tech holdings, along with rate-sensitive groups like utilities, staples, and real estate.

Despite the Fed’s predictions of fewer rate cuts and Chair Jerome Powell’s hawkish remarks, the S&P 500 Index broke past 5,400 for the first time ever on Wednesday and maintained this level through Friday.

The benchmark has surged over 50% since bottoming out in October 2022, proving that sometimes, defying the Fed can pay off.

Scenario Spotlight: What happens to Tech when the Fed cuts?

The chart above illustrates the historical 6-month response of the S&P 500 Technology sector following the previous 30 instances when the FED cut rates.

Market Movers: Tech stocks to watch

XXTHere is the historical 6-month response from the ten largest US tech stocks, post previous rate cuts:

1. Tesla: 148.10%
2. Nvidia: 30.20%
3. Amazon: 20.45%
4. Adobe: 8.37%
5. Microsoft: 7.05%
6. Apple: 4.60%
7. Oracle: 0.87%
8. Broadcom: -1.27%
9. Alphabet A: -1.76%

Earnings Spotlight: Lennar reports tonight!

Investors should note that analysts anticipate Lennar to post earnings per share (EPS) of $3.23 on revenue of $8.552 billion, reflecting year-over-year increases of 7.3% and 7.2%, respectively.

This growth in EPS outpacing revenue indicates a healthy level of operating and financial leverage within the company. Furthermore, Lennar's impressive track record of surpassing earnings estimates in seven of the past eight quarters adds an optimistic edge to the upcoming report.