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

After the Federal Reserve fulfilled the market's long-awaited interest rate cut, Wall Street did not indulge in a celebration but instead staged a classic "sell the news" trade. Funds on Wall Street flowed out of overvalued tech stocks and shifted towards traditional sectors such as finance and utilities that benefit from interest rate cuts.

According to Wall Street News, on Thursday, the Federal Reserve cut interest rates by 25 basis points as expected, emphasizing the downside risks to employment and predicting two more cuts within the year. The tech-heavy Nasdaq 100 index fell by 0.2%, making it the worst-performing sector, while the Tech Giants Index dropped by 0.66%, ending a four-day winning streak.

In the subsequent press conference, Federal Reserve Chairman Jerome Powell emphasized that inflation risks have "slightly increased" and referred to this action as a "risk management" rate cut. This statement further intensified the sell-off in tech stocks, with the Tech Giants performing worse than the remaining 493 stocks in the S&P index on that day.

(Buying support after Powell's speech narrowed the decline of the Tech Giants Index)

Tech Giants Experience "Sell the News" Trade

The recent pullback in tech stocks is widely viewed as a correction to the previous massive gains.

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

For growth stocks, some of the trading is a sell the news reaction, as prior to this, the market's strong expectations for rate cuts had pushed the U.S. stock market to record highs.

Data shows that since early April, the basket of "Tech Giants," including NVIDIA and Alphabet, has surged nearly 60%, with its expected price-to-earnings ratio climbing from nearly 22 times to 30 times. Ivan Feinseth added:

After such a significant rise, overvalued tech stocks should naturally take a breather. Additionally, there remains a lot of uncertainty about how tariffs will impact the economy.

Besides the sell the news trade, the rise in U.S. Treasury yields has also somewhat pressured the stock prices of tech giants.

U.S. Treasury yields initially fell sharply after the Federal Reserve's statement, but Powell's remarks reversed the day's downward trend, quickly pushing yields higher. Ultimately, the 10-year U.S. Treasury yield rose by 6.3 basis points, while the 2-year yield increased by 5.62 basis points.

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

Theoretically, tech companies are particularly susceptible to rising U.S. Treasury yields because their valuations are largely based on profit expectations over the coming years, and higher yields reduce the present value of those future profits It is worth noting that there is a divergence in the performance of technology stocks.

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

Traditional sectors benefit from interest rate cut expectations

As tech stocks faced pressure, funds clearly flowed into sectors that could directly benefit from falling interest rates.

The financial, consumer staples, and utilities sectors became the best-performing groups in the S&P 500 index that day. These sectors typically pay generous dividends, making them attractive to income-focused investors in a rate-cutting environment.

The banking sector performed particularly well. The KBW Bank Index rose by 1.3%, with components including JP Morgan, Bank of America, and Citigroup. Lower interest 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 briefly rose by 2.1% and ultimately closed up 0.2%. A basket of unprofitable tech companies tracked by Goldman Sachs rose by 1.9%.

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

While a deep recession seems unlikely, the current valuations of growth stocks and large tech companies appear excessive after a significant rally.

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

On Wednesday, the S&P 500 index only fell by 0.1%, marking one of the least volatile Federal Reserve decision days in at least two years. Looking ahead, John Cunnison believes:

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