Fed "Rate Cut Day": Tech Giants' Stocks "Sell the Fact"

Analysts believe that the previous strong expectations for interest rate cuts had already pushed the U.S. stock market to record highs.

Written by: Bao Yilong

Source: Wallstreetcn

After the Federal Reserve delivered the long-awaited rate cut, Wall Street did not indulge in euphoria. Instead, a classic "sell the news" trade unfolded. Funds flowed out of overvalued tech stocks and shifted towards traditional sectors such as financials and utilities, which benefit from rate cuts.

According to Wallstreetcn, on Thursday the Federal Reserve cut rates by 25 basis points as expected, emphasized downside risks to employment, and projected two more cuts this year. The tech-heavy Nasdaq 100 Index fell 0.2%, making technology the worst-performing sector. The Tech Magnificent Seven Index dropped 0.66%, ending a four-day winning streak.

At the subsequent press conference, Federal Reserve Chair Powell emphasized that inflation risks had "slightly increased" and described the move as a "risk management" rate cut. This statement further intensified the sell-off in tech stocks, with the Tech Magnificent Seven underperforming the remaining 493 stocks in the S&P 500 Index that day.

(After Powell stopped speaking, buying support narrowed the decline of the Tech Magnificent Seven Index)

A "sell the news" trade emerged among tech giants

This tech stock pullback is widely seen as a correction to the previous massive gains.

Ivan Feinseth, Chief Investment Officer at Tigress Financial Partners, stated:

For growth stocks, some of the trading is "sell the news," because prior to this, strong expectations for rate cuts had already pushed the U.S. stock market to record highs.

Data shows that since early April, the "Tech Magnificent Seven" stock basket, including Nvidia and Alphabet, has soared nearly 60%, with its forward price-to-earnings ratio climbing from nearly 22 times to 30 times. Ivan Feinseth added:

After such a surge, highly valued tech stocks deserve a breather. In addition, there is still a lot of uncertainty about how tariffs will affect the economy.

In addition to "sell the news" trading, the rise in U.S. Treasury yields has also weighed on tech giants' stock prices to some extent.

U.S. Treasury yields briefly fell after the Fed statement, but Powell's remarks reversed the intraday weakness and sent yields sharply higher. Ultimately, the 10-year Treasury yield rose 6.3 basis points, and the 2-year yield rose 5.62 basis points.

(Comparison chart of yields for major U.S. Treasury maturities)

Theoretically, tech companies are particularly vulnerable to rising Treasury yields because their valuations are largely based on expectations of profits many years into the future, and higher yields reduce the present value of those future profits.

It is worth noting that there was a divergence within tech stocks.

Rate-sensitive tech stocks such as Nvidia, Amazon, and Broadcom all closed lower, while Apple and Microsoft, traditionally seen as safe-haven assets due to their robust business models and cash generation capabilities, rose.

Traditional Sectors Benefit from Rate Cut Expectations

As tech stocks came under pressure, funds clearly flowed into sectors that can directly benefit from lower interest rates.

Financials, consumer staples, and utilities became the best-performing groups in the S&P 500 Index that day. These sectors typically pay generous dividends and are attractive to income investors in a rate-cutting environment.

The banking sector was particularly outstanding. The KBW Bank Index rose 1.3%, with its components including JPMorgan, Bank of America, and Citigroup. Lower rates are expected to stimulate loan demand while reducing banks' deposit costs.

Other corners of the market also reflected this shift in risk appetite. The Russell 2000 small-cap index once rose 2.1% and ultimately closed up 0.2%. A basket index of unprofitable tech companies tracked by Goldman Sachs rose 1.9%.

John Cunnison, Chief Investment Officer at Baker Boyer Bank, said that lower rates will support higher-risk companies in the stock market, especially small caps and unprofitable tech companies. However, he also warned:

While a deep recession seems unlikely, after a round of sharp gains, the current valuations of growth stocks and large tech stocks appear to be too high.

Despite the market rotation, there was no panic. The Cboe Volatility Index (VIX), known as Wall Street's "fear index," fell below 16, well below the 20 level typically seen when the market is under pressure.

On Wednesday, the S&P 500 Index fell just 0.1% for the day, marking one of the least volatile Fed decision days in at least two years. Looking ahead, John Cunnison believes:

The bigger question now facing traders is what all this means for future rate cuts and the direction of the economy.