Tech Stocks Fall 0.66% as Fed Cuts Rates, "Sell the Fact" Phenomenon Emerges

On the day the Federal Reserve cut interest rates, the tech giants' stocks experienced a "sell the fact" phenomenon. The "tech seven giants" index fell by 0.66%, ending a four-day winning streak. Analysts believe that the market's strong expectations for a rate cut had already pushed the U.S. stock market to record highs. After a significant rally, high-valued tech stocks were due for a breather, and some of the trading was attributed to selling the fact.

Following the Federal Reserve's delivery of the long-awaited rate cut, Wall Street did not indulge in celebration but instead witnessed a classic "sell the fact" trade. Funds flowed out of high-valued tech stocks and into traditional sectors such as finance and utilities, which benefit from lower interest rates.

On Thursday, the Federal Reserve cut interest rates by 25 basis points as expected, emphasizing the downside risks to employment and predicting two more cuts for the year. The tech-heavy Nasdaq 100 index fell by 0.2%, with the tech sector performing the worst. The "tech seven giants" index dropped by 0.66%, ending its four-day winning streak.

During the subsequent press conference, Federal Reserve Chairman emphasized that inflation risks had "slightly increased" and described the move as a "risk management" rate cut. This statement further intensified the selling of tech stocks, with the "tech seven giants" underperforming the remaining 493 components of the S&P 500 index that day.

This pullback in tech stocks was widely seen as a correction to the previous significant gains. The chief investment officer of a financial firm stated that for growth stocks, some of the trading was due to selling the fact, as the market's strong expectations for a rate cut had already pushed the U.S. stock market to record highs. Data showed that since early April, a basket of "tech seven giants" stocks, including NVIDIA and Alphabet, had surged by nearly 60%, with their expected price-to-earnings ratio rising from around 22 times to 30 times. The chief investment officer added that after such a large rally, high-valued tech stocks were due for a breather. Additionally, there were still many uncertainties regarding how tariffs would impact the economy.

Besides the "sell the fact" trading, the rise in U.S. Treasury yields also put pressure on the tech giants' stock prices. U.S. Treasury yields initially fell sharply after the Federal Reserve's statement but then reversed course and rose rapidly following the chairman's remarks. The 10-year U.S. Treasury yield rose by 6.3 basis points, and the 2-year yield increased by 5.62 basis points.

Theoretically, tech companies are particularly vulnerable to rising U.S. Treasury yields because their valuations are largely based on expected earnings over many years. Higher yields reduce the present value of these future profits.

Notably, there was a divergence within the tech sector. Tech stocks sensitive to interest rates, such as NVIDIA, Amazon, and Broadcom, all closed lower, while Apple and Microsoft rose due to their stable business models and strong cash-generating capabilities, traditionally seen as safe-haven assets.

When tech stocks came under pressure, funds clearly flowed into sectors that directly benefit from lower interest rates. Financials, consumer staples, and utilities were the best-performing groups in the S&P 500 that day. These sectors typically pay generous dividends and are attractive to income-oriented investors in a low-rate environment.

The banking sector stood out, with the KBW Bank Index rising by 1.3%. This index includes major banks such as JPMorgan Chase, Bank of America, and Citigroup. Lower interest rates are expected to stimulate loan demand and reduce banks' funding costs.

Other parts of the market also reflected this shift in risk appetite. The Russell 2000 small-cap index initially rose by 2.1% and eventually closed up by 0.2%. A basket of unprofitable tech companies tracked by Goldman Sachs rose by 1.9%. The chief investment officer of a bank stated that lower interest rates would support riskier companies in the stock market, particularly small caps and unprofitable tech companies. However, he also warned that while a deep recession seemed unlikely, the current valuations of growth stocks and large tech companies appeared high after a significant rally.

Despite the market rotation, there was no sign of panic. The Cboe Volatility Index, known as Wall Street's "fear gauge," fell below 16, well below the typical level of 20 seen during market stress. On Wednesday, the S&P 500 index fell by only 0.1%, making it one of the least volatile Federal Reserve decision days in at least two years. Looking ahead, the chief investment officer of a bank stated that the bigger question for traders now is what this all means for future rate cuts and the economic outlook.