Tech continues to drive markets as investors await two key events: the US debt-ceiling resolution a

DEWITT, Mich. - June 1, 2023 - PRLog --

• While stock markets were broadly flat this past week, one sector stood out in that it was up over 4.0% for the week: information technology¹. In fact, the technology sector is one of just three sectors in the S&P 500 Index that is positive year-to-date, along with consumer discretionary and communication services. Technology and communication services are now up over 30% this year already, well into bull-market territory¹. Meanwhile, each of the other eight S&P 500 sectors is negative this year thus far, perhaps reflecting the uncertainty around the ongoing U.S. debt-ceiling standoff, future path of Fed rate hikes, and potential economic softness.
• Market leadership has clearly been narrow this year, led by just a few sectors and a handful of large-cap technology companies, and in many cases driven by valuation expansion. For long-term investors this is not always a sign of healthy market performance, as it can reflect overcrowding in one area and uncertainty around the broader economy in others.

What is driving the outperformance in the technology sector?

There may be a few reasons behind the recent technology outperformance. First, growth sectors were the biggest laggards last year, and they experienced the sharpest declines in valuations, perhaps making the technology and growth areas more appealing to investors looking for bargains. Secondly, many large-cap technology stocks have become part of a defensive strategy more recently. These companies have certainly shown resilience through this past earnings season, highlighting their defensible business models and strong financial positions, and returning value to shareholders through share-repurchase programs.

Where do we stand on the U.S. debt ceiling? A deal seems imminent

Part of the uncertainty that investors face, near-term of course, lies in the ongoing U.S. debt-ceiling negotiation. However, according to recent reports, a tentative deal is taking shape ahead of the June 1 noted deadline (the X-date) that could increase the debt ceiling and cap federal spending for two years, except for the military and veterans². Some other details include a potential 3% rise in defense spending next year, a measure to upgrade the nation's electric grid, and permits granted for pipelines and other fossil-fuel projects². There is also a focus on rescinding some of the $80 billion allocated for the Internal Revenue Service as part of the Biden administration's Inflation Reduction Act².

Opportunities may be emerging for equity and bond investors

Overall, we would expect the markets' recent narrow leadership to potentially persist in the near term, as investors gravitate toward an approach that favors both technology and growth sectors and cash-like bonds.

Sources: 1. Factset. 2. Bloomberg