An end to Fed rate hikes is just one reason why technology stocks are holding up amid the broader market chaos

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Bryan R Smith
  • Technology stocks have shown remarkable resilience this month despite an ongoing bank crisis.

  • Part of the strength in tech has been driven by expectations that the Fed is done hiking interest rates.

  • These are five reasons why technology stocks have been holding up well, according to Fundstrat.

Despite a banking crisis that led to the biggest bank failure since 2008, technology stocks are doing just fine.

Since Silicon Valley Bank was taken over by the FDIC on March 10, the technology sector has surged 7%, far outpacing the S&P 500's gain of about 2% over the same time period.

But there's good reason why tech stocks are now leading the way, according to a Friday note from Fundstrat's Tom Lee, and it mainly has to do with expectations that the Federal Reserve just enacted its last interest rate hike of the current tightening cycle.

"The Fed is focused on the impact of the banking crisis and its associated ripple effects on the economy via credit contraction and lower consumer confidence," Lee said. "In fact, the Fed even noted this crisis is equivalent to a tightening of monetary policy."

In other words, the collapse of Silicon Valley Bank has in effect done some of the Fed's job in tightening lending standards, which should help tame inflation, and that could mean the Fed is done hiking interest rates.

In fact, current market expectations call for at least 100 basis points in interest rate cuts between now and the end of the year, according to the CME FedWatch Tool.

And technology stocks, which were hurt the most when the Fed started its aggressive interest rate hikes in March 2022, are now poised to benefit the most from a pause or even a decline in interest rate hikes.

These are the four other reasons why technology stocks are holding up so well despite the ongoing market volatility and banking turmoil, according to Lee.

1. "Inflation expectations [are] dropping, lowering nominal rates = higher price-to-earnings [multiples] but not recession risk."

2. "For an investor, owning a FAANG stock is 'safer' to keeping money at brokerage/bank."

3. "Bank crisis is not systemic, even if investors are fearful such is the case."

4. "There is nobody left to 'sell' evidenced by the fact money market cash balances exploded higher with $1.86 trillion of retail cash on sidelines."

All-in, technology remains a favorite pick for Lee this year, especially the mega-cap tech giants that don't have to rely on the banks given their cash cow businesses.

"Ultimately, we think the relative strength of equities is important... This is a flight to 'safe' assets and leading this is bitcoin and FAANG," Lee concluded.

Read the original article on Business Insider