This time last week, I said that “FOMO reigns supreme.” And today, I can confidently tell you that hasn’t changed.
For the second week running, technology stocks have been the strongest performing sector… and by a wide margin. The tech sector returned 2.54% last week, more than triple the return of the S&P 500.
But the biggest takeaway isn’t just that tech is doing phenomenally well, but rather that virtually everything else is doing poorly. Apart from tech, the consumer discretionary sector was the only other sector to have a strong week. All other sectors were either flat or negative.
So, what is the story here?
One of the themes of the past year has been the reality that there are two economies. There is the booming tech economy, which has never been stronger… and there is the “everything else” economy, which has really been struggling due to lingering inflation and policy uncertainty.
In a cap-weighted index like the S&P 500, the index can be “top-heavy” in that the largest companies have an outsized impact on the overall index. And that’s exactly what we are seeing today. Because the tech sector is now home to multiple companies with gargantuan market caps over $4 trillion, strong returns in tech pulled the entire S&P 500 higher, even if the vast majority of sectors didn’t participate.
AI is likely playing a major role in the divergence between the two economies. The same AI that is leading to record profits in the tech sector may also be leading to job cuts virtually everywhere else.
Perhaps nothing sums it up better than Chipotle Mexican Grill’s (CMG) earnings last week. The burrito chain cut its full-year sales outlook for the third consecutive quarter, and CEO Scott Boatright noted that its key demographic of young professionals (aged 25-35) was struggling with “unemployment, increased due to loan repayment and slower real wage growth.”
In other words, paying $10+ for a lunch burrito is a luxury they can’t afford.
This market is dominated by Big Tech and by higher-income consumers willing and able to throw down the credit card for discretionary purchases. That’s investable, of course. We can play those trends. But we’ll want to pick and choose carefully.
Let’s dig deeper into the data.
Key Insights:
- The S&P 500 continued to push to new all-time highs.
- Technology was the standout, returning 2.4%.
- Most sectors were lower, reinforcing the idea that there are two economies today.
Tech Sector’s Big Movers
Below are the nine best-performing technology stocks that finished the week positive and closed within 10% of their 52-week highs.
The standout winner last week was Teradyne (TER), a leader in robotics and testing systems. Its shares exploded higher by 26% following a better-than-expected earnings report.
The leading hard drive makers, Western Digital (WDC) and Seagate (STX), also had a fantastic week, up 16.1% and 9.3%. And naturally, Nvidia (NVDA) – the largest company in history by market cap – powered higher by more than 8% following its GTC Conference in Washington, DC.
All these moves are consistent with the continued capital spending boom in AI.
The capital spending boom is very real and very visible, but we should be careful how we invest in it. Of all the top nine technology stocks from last week, only Western Digital, Alphabet (GOOGL) and TE Connectivity (TEL) rate as bullish on my Green Zone Power Ratings system. The rest are neutral or bearish. Teradyne, for example, rates a bearish 37 and rates particularly poorly on its value, growth and volatility factors.
Real Estate Really Taking a Pounding
Last week was not pleasant for real estate stocks. The sector was down by more than 4%, followed closely by the materials sector.
As for the “why,” you can thank Mr. Powell. While the Federal Reserve did indeed cut interest rates by 0.25%, as Wall Street expected, it cast doubt as to the speed and depth of future rate cuts, saying “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”
Real estate investment trusts (REITs) are interest rate sensitive for two core reasons. To start, they are highly leveraged. High interest rates lead to high interest expense, which cuts directly into their earnings.
But beyond that, investors tend to view REITs as bond substitutes. So, when interest rates are expected to fall, REIT prices tend to rise, and vice versa. The prospect of higher-for-longer interest rates is not what investors wanted to hear.
After a thorough thrashing like this, might there be some potential bargain-hunting opportunities?
Maybe. But my Green Zone Power Rating system is advising caution. All nine stocks rate as bearish. And to show just how bearish, Alexandria Real Estate Equities (ARE) rates a 5 out of 100, making it one of the highest-risk stocks in the entire S&P 500.
I’d note that REITs are often penalized on my Green Zone Power Rating System because their quirky accounting tends to drag down their quality, value and growth factor ratings. So, it’s fair to say that their situations probably aren’t quite as dire as their low fundamental scores suggest. I’m not expecting a wave of bankruptcies any time soon.
That said, their technical factors also look weak, and none rate particularly well on their momentum or volatility factors. There’s just no compelling reason to invest in the sector right now.
Real estate stocks will have their day in the sun again. But for the moment, my Green Zone Power Rating system is advising caution.
To see how any of these stocks rate overall, as well as on the six factors that drive my system, click here to join me in Green Zone Fortunes today. One of many benefits of joining is the freedom to look up any of these stocks (or thousands of others) with just a few clicks of your mouse.
To good profits,
Editor, What My System Says Today