After New Year Rally, Fragile Megacap Tech Stocks Face CPI Test

After a tough year for tech stocks, investors are feeling more optimistic as we start 2023. They're betting that the Federal Reserve will slow down the pace of interest rate hikes. We'll see if that optimism is warranted when we get the first inflation reading of the year.
Tech giants including Apple, Microsoft, Alphabet (Google's parent company) and Amazon have all risen in value for four straight days, as investors believe that December's consumer price index will show further evidence of slowing inflation. Amazon is currently in the lead, having gained 13% so far this year.
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Since the Fed began raising rates, tech stocks have lagged behind the rest of the market, losing more than $3 trillion in value in 2022. Higher inflation and fears of an economic downturn have also weighed on the shares, as consumers and businesses cut back on spending. Last month, the Fed dialed back its rate increases to half a percentage point from 0.75 previously, and a favorable reading on Thursday could allow for an even smaller hike in February.
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"It's been a great start to the year for risk assets, and tech is definitely one of those," said Craig Erlam, senior market analyst at Oanda. "If CPI comes in below expectations, it could be a setback, but depending on the number, it may not be enough to derail hopes of a 25-basis-point rate hike next month. The trend has become very favorable, and that's what matters most."
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This year, the Nasdaq 100 Index has risen by 4.2%, outpacing the 3.4% increase for the S&P 500 Index. This is a sign that investors' appetite for risk has been revived. A basket of unprofitable tech stocks compiled by Goldman Sachs Group Inc. has risen by 9.1% so far this year.
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Higher rates tend to have a negative impact on shares of unprofitable and high-valuation growth companies, because their stock prices are based on their future prospects, with bond yields used to discount the value of earnings that they may not see for years.
Economists surveyed by Bloomberg expect core inflation to have increased by 5.7% last month, which would be a slowdown from the 6% seen the previous month. However, if inflation turns out to be higher than expected, it could weigh on tech stocks, according to Jim Dixon, a senior equity sales trader at ‍
He said that the biggest tech companies were all poor performers last year, and that if the data isn't positive, other sectors like industrials and meme stocks will feel the brunt of the selloff.

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The Philadelphia Stock Exchange Semiconductor Index (SOX) has rallied 27% from its October closing low, outperforming the S&P 500 and Nasdaq 100 indexes handily. The benchmark indexes have risen 11% and 6.6% in the same period, respectively. The chip gauge is staging a gradual recovery after slumping 36% last year, its biggest annual drop since 2008.