🚀 Tech Stocks Surge After CPI Data Sparks Market Rally

Over the last two months, significant momentum for high-growth tech companies has returned through improved market conditions. On average, publicly traded technology firms have increased in value by double digits point-to-point in the two months since the Consumer Price Index report (CPI) was negatively impacted by COVID-19 – therefore, since July of 2020 the stock market has been rebounding significantly throughout much of the month and into September.

With falling inflation rates, increased demand for tech has created an ideal environment for more aggressive investors. Here are some examples of how tech has been exiting the recent downturn:

• Chipmakers and companies involved in artificial intelligence (AI) have shown renewed demand.

The Implications of CPI Data on the Technology Sector

Technology Companies and Inflation

The technology sector is particularly sensitive to both inflation figures and interest rates for a couple reasons:

Valuation Relative to Earnings Growth

The valuation of tech companies is based, to a large extent, on future growth in earnings. Increases in interest rates can reduce the present value of those future profits.

Valuation Expectations Change with Rate Cuts

Lower inflation can increase investor expectations for a potential cut in rates or possible stabilisation of rates.

When CPI data is released that is lower than expected, the following occurs, based on the CPI data:

• Valuation Expansion

• Increased Liquidity in Growth Sectors

• Momentum Based Buying

All of these things are taking place right now in terms of the current rally position of the technology sector.

Market Sentiment

The most recent rally in the technology sector has been built around investor psychology rather than just numbers; For example, several weeks ago:

• Political Events Raised Global Geopolitical Risk

• Uncertain Inflation Outlook

• Concerns of Long-Term High Rates

However, the current view is now very different:

• Consensus Views Indicate Inflation is Cooling

• Earnings Growth Seen as Becoming More Stable

• Growth Factors Supporting Technology Will Remain in Place

The current transition in market sentiment supports a classic FOMO (Fear of Missing Out) view on rotational investment back into technology.

Immediate Takeaway to Investors

The most recent rally in the technology sector supports one important belief:

"Macro Data Moves Markets More Than Headline Data."

Even a very minor beat in CPI can create billions of dollars in capital rotation, even in very fragile market sentiment.

• Technology Sector Rallies Can Be Fast, But Can Also Be Volatile.

• Earnings Season Determines Length of Any Rally

• The Risks Associated With The Major Indices Are Still Present

Conclusion The speed with which sentiment changes is clearly demonstrated by the current market conditions; just a single piece of inflation data has been able to spark a tech-driven rally, resulting in numerous stocks experiencing gains of over 10% in one month alone. Whether or not this is the beginning of a long-term bull run or merely a short-term relief rally will ultimately depend upon future economic and earnings data releases. At this time one thing is certain: 👉 Technology is the new buzzword, and investors are listening.