The tech sector is gearing up for what could be one of its best quarters yet, with the Nasdaq 100 index on track for its second-highest quarterly gain in the past decade. This remarkable surge can be attributed to the recent support provided by the US Federal Reserve.
The tech gauge has already surged by 17% in the first quarter of the year, and if current trends continue, the Nasdaq could surpass its impressive performance from Q2 2020, when it rose more than 30%. During that period, the Fed’s liquidity injections aimed at mitigating the effects of the pandemic helped propel the tech industry to new heights.
The recent rally in the tech industry comes as no surprise, given the clear correlation between the Federal Reserve’s monetary policy and the performance of tech shares. The Fed’s recent loosening of its balance sheet following Silicon Valley Bank’s collapse has helped allay concerns about monetary conditions tightening and has buoyed investor sentiment in the tech sector.
The chart below demonstrates the positive impact of Fed easing on tech shares. Last year, when the central bank began tightening, tech shares struggled. However, the Nasdaq’s recent 10% gain coincided with the Fed’s balance sheet expanding by a whopping $400 billion. It’s clear that the tech rally will continue if the Fed continues to inject liquidity into the market.
It’s not just the US tech industry that’s benefiting from the Fed’s support. Global tech stocks have been outperforming banking shares since early March, after largely moving in tandem last year. The divergence between the sectors highlights two key points.
Firstly, the current tech rally is expected to continue as traders increasingly bet that banking turmoil will lead the Fed, the European Central Bank, and the Bank of England to pivot from fighting inflation as their primary goal and cut rates before the end of the year. A low interest-rate environment is favorable for growth stocks like tech, which could continue to benefit from the current conditions.
Secondly, tech firms, with their low debt levels and strong balance sheets, are better positioned to weather financial turmoil. As the corporate world increasingly shifts towards digitization, demand for tech products and services is growing rapidly, and this trend is expected to continue. Moreover, with the current craze for all-things AI heating up, tech firms are set to benefit even further.
In conclusion, the tech sector is set for another exceptional quarter, thanks to the Federal Reserve’s support and the ongoing shift towards digitization. Tech stocks are expected to continue outperforming, and investors are increasingly betting that the current rally will continue for the foreseeable future.
