Big Tech Will Outperform Big Pan in High Interest Rate Environment Wall Street Pros

No interest rate cuts, no problem.

With mega-cap tech stocks returning to favor last week, investors are revisiting the old game rules. In Thursday's trading, despite another hot inflation report that put the Fed's plans to cut interest rates this year in doubt, investors' appetite for growth stocks returned.

That's a bit surprising, given that growth stocks are usually more sensitive to interest rate hikes. But experts say the reasons are obvious: strong fundamentals and lots of cash.

"Many mega-cap growth stocks are flush with cash and have low debt levels, so they tend to be less dependent on financing needs and less sensitive to interest rates," Keith Lerner, Matrix Investment Officer at Truist, told Yahoo Finance.

The Magnificent Seven-Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla (TSLA)-have free cash flow that jumps to more than 100 billion U.S. dollars by 2023.

The group outperformed the broader rock last week, with the Roundhill Magnificent Seven ETF (MAGS) closing the week higher while the S&P 500 fell 1.6%. Amazon hit a new all-time high and Alphabet's valuation briefly topped $2 trillion. Even Apple finally gained traction with investors, posting its best day in nearly a year.

Wall Street pros tell Yahoo Finance that the group will likely continue to outperform Big Pan, at least relatively, in a prolonged environment of higher interest rates.

Cameron Dawson of NewEdge Wealth said the large tech company's solid balance sheet and fundamentals suggest the group is a "defensive" and "safe" investment, adding that the group is "probably a good buy in the short term". The company "may be buyable in the near term," Dawson added.

"The technology sector, which is less sensitive to a reduction in the number of Fed rate cuts than other sectors, is likely to outperform in this environment," Lerner said.

Ryan Detrick, Premier Market Strategist at Carson Group, told Yahoo! Finance that in addition to large cash reserves, the economic recovery will also be good for the Mag 7. So far, there's little indication that a rise in interest rates will slow GDP growth or corporate earnings.

Dettori resonance expects that continued economic growth will "provide opportunities for the group, even if the noodles face fewer rate cuts."

A more resilient economy could spur business activity and eventually boost profits this earnings season, another factor expected to drive big tech companies in the near term. Analysts expect the industry's first-quarter profit to surge 20%, according to Bloomberg data.

Wedbush's Dan Ives sees the first quarter as a "major positive catalyst."

"We expect tech stocks to rise another 15% this year, adding to a strong start to 2024," Ives wrote in a note to clients last week.

In a nutshell: a delayed rate cut does not mean a decline for the tech giants. On the contrary, companies with strong fundamentals can outperform despite valuation and interest rate concerns, potentially providing stability to the broader market landscape.

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