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Big Tech will do better in a high interest rate environment: Wall Street professionals

No interest rate cuts, no problem.

Investors are revisiting an old playbook as mega-cap tech stocks returned to favor last week. The appetite for growth returned during Thursday’s trading action, despite a new inflation report casting doubt on Federal Reserve rate cuts this year.

That was a bit of a surprise, as growth stocks tend to be more sensitive to higher interest rates. But experts say the reason why is clear: strong fundamentals and big money flows.

“Many of these mega-cap growth stocks are cash-rich 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.

The free cash flow of Magnificent 7 members – Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT) and Tesla (TSLA) – rose by more than $100 billion by 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 exceeded $2 trillion. Even Apple finally got an offer from investors and recorded its best day in almost a year.

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And Wall Street pros tell Yahoo Finance that the group is likely to continue to outperform in an environment of higher and longer interest rates, at least on a relative basis.

Cameron Dawson of NewEdge Wealth said the strong balance sheets and fundamentals of the big tech sector suggest the group is pursuing a “defensive” and “safe” strategy, adding that pullbacks are “likely to be bought in the near term.”

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

In addition to the large amounts of cash, a resilient economy will be a boon for the Mag 7, Ryan Detrick, chief market strategist at Carson Group, told Yahoo Finance. So far, there is little sign that higher interest rates are slowing GDP growth or corporate profits.

Detrick expects that continued economic growth “will provide opportunities for the group, even if fewer interest rate cuts occur.”

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

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

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

To summarize, delayed interest rate cuts do not mean a downturn for the biggest names in tech. On the contrary, countries with strong fundamentals can outperform – despite valuation and interest rate concerns – and potentially provide stability to the broader market landscape.

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

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