Tech Stocks Surging As Retail Cools

Key Takeaways

• Can The S&P 500 Break Above 4200?
• Tech Stocks Posting Big Gains
• Interest Rate Hike Back On The Table?

Markets head into Friday looking to close out the week on a high note. Through Thursday, both the S&P 500 and Nasdaq Composite are up over 1.5%, for the week. with the S&P 500 closing at its highest level since late August. The story here has been the strength of some traditional market leading stocks in the tech sector.

Apple
AAPL
, Google
GOOG
, Microsoft
MSFT
, Netflix
NFLX
and Nvidia all hit 52 week highs on Thursday. This is something I discussed on Wednesday when I pointed out the gains some of these stocks have had since March. Other stocks, like Amazon
AMZN
and Tesla
TSLA
, are still well off 52 week highs; however, year-to-date both stocks are up over 40%. This resurgence of leadership stocks is something I talked about back in April when discussing how some of the “second line” stocks had really held the market and questioned if the starters could come back and make a run, which they have thus far done.

While tech stocks are surging, we’re seeing some stagnation in retail stocks. Earnings from Walmart
WMT
, Target
TGT
and most recently, Ross Stores
ROST
have been a mixed bag. However, one commonality is their outlook which has tempered a bit as inflation continues to be a nagging issue, this is also reflected in mostly disappointing same store sales. Also weighing on some of these retailers is the end of Covid financial assistance programs. As those programs have wound down, customers are cutting back on purchases or trading down. Therefore, it will be interesting moving forward to see if the effects of these programs ending will weigh on retailers but also, if this helps tamper down inflation.

Speaking of inflation, the picture here is mixed. While the jobs market remain inexplicably strong, there are other signs that inflation is being reigned in. Yesterday we learned that existing home sales in April fell 3.4% from March and were down 23% on a year-over-year basis. As I’ve discussed in the past, a slowdown in the housing sector will likely reverberate throughout the economy. Homeowners often borrow against their homes, especially for larger item purchases. However, if there are signs prices are cooling, they slow down on borrowing. In fact, I think that is exactly what is happening right now as retailers are reporting a slowdown in big ticket item sales.

As we head into the back half of May and near June’s Federal Open Market Committee (FOMC) meeting, we’re seeing markets shift their stance a bit as to what the Fed will do. After the last meeting, markets were forecasting a near 100% certainty the Fed would not raise rates in June. That has since changed and as of Friday premarket, interest rate scouts are now giving a better than 35% chance of a quarter point rate hike at the next meeting. This is something I’ll be watching closely and could make next week’s Personal Consumption Expenditures (PCE) release very important.

Finally, as fears of a U.S. default fade and optimism grows for a deal on the debt ceiling, markets are beginning to strengthen throughout the world. U.S. markets are clearly leading the way as volatility is at levels not seen since late 2021 with the VIX below 16 in premarket. The S&P 500 is right at the 4200 level I’ve repeatedly mentioned as a key resistance level and in Japan, the Nikkei 225 is trading at a level not seen since 1990. It’ll be interesting to see is we can close out the week on strength and continue recent gains into summer. As always, I would stick with your investing plan and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.