The stock market needs Apple and Big Tech to keep rising. It might be difficult.

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Apple has received reports that it has cut iPhone production due to parts shortages.

Feline Lim / Getty Images

If you’re looking for a reason the stock market has bottomed out, look no further than Big Tech. And if you’re looking for a reason it might start sliding again, look no further than… Big Tech.

During the


S&P 500

5.2% drop from its September 2 high to its October 4 low,


Apple

(ticker: AAPL),


Microsoft

(MSFT),


Facebook

(FB),


Amazon.com

(AMZN), and


Alphabet

(GOOGL) fell an average of 8.6%. This made the S&P 500’s comeback almost impossible, as these stocks make up about one-fifth of the benchmark. They have all performed better since then, gaining 4.1% on average. It helped the S&P do something it hasn’t done in nearly three weeks: close above its 50-day moving average, a sign that the overall market may be ready to rally again.

There was no news – at least no good news – to lift Big Tech over the past few and a half weeks. Apple has received reports that it has cut iPhone production due to parts shortages. Microsoft has finally decided to cut the bait and remove LinkedIn from China. Amazon has been accused of copying products popular in India. And Facebook was, well, Facebook. Only Alphabet, which JP Morgan recently described as “the most beloved” of Internet headlines, has come out without the smell of bad PR.

But these days, a big move in bond yields can trump rumors, innuendos and scuttling. The 10-year Treasury yield fell from 1.29% in September to 1.611% on October 11, a rise that coincided with Big Tech’s decline. And the rally in stocks from their lows of last week coincided with the 10-year yield returning to 1.519%. It stood at 1.576% by early Friday afternoon.

The link between returns and tech stocks is not an illusion. The correlation between the performance of the S&P 500 Technology Sector Index, relative to that of the S&P 500, on the one hand, and the 10-year yield on the other hand, has averaged -0.69 this year, and reached -0.78 for the 126 days ended in September. 30. (A correlation of -1 means that two variables evolve in perfect opposition.)

“Due to this recent trend, any rise in yields appears to be a default default for tech stocks and raises immediate concern of a sell-off among investors,” writes Brian Belski, chief investment strategist at BMO Markets. capital.

However, Belski adds, the correlation between the technology’s relative performance and the 10-year yield has historically fluctuated from negative to positive and vice versa, with no real pattern. In fact, the technology has topped the S&P 500 in five of the previous periods of rate hikes – and is doing so again, from the 10-year yield low in March 2020. For Belski, that’s a sign that technology investors should be careful, but should avoid massive dumping of stocks. “[We] see the S&P 500 information technology sector as a market player in the coming months and believe the focus should be on stock picking, ”he advises.

But rising yields aren’t the only danger for Big Techs, observes Sevens Report’s Tom Essaye. Equities face regulatory headwinds that may finally start to be felt. At the same time, cases of Covid-19 continue to decline, suggesting that the group is losing a tailwind for its profits and its stock price.

When Evercore analyst Mark Mahaney added Facebook to his list of tactical underperformance last Thursday, he noted that online advertising platforms, including Alphabet and


Twitter

(TWTR), could have a hard time. The reason: The momentum given to online shopping by the pandemic is starting to wane, according to Mahaney. “Now we believe the reverse is likely to happen and therefore will have a similar negative impact on their fundamentals,” he wrote. Facebook publishes its quarterly results on October 25; Alphabet, October 26.

Other Big Techs are facing similar issues. Online retailers’ profits are expected to fall more than 20% year-over-year, according to


Swiss credit

The data. This could be particularly painful for Amazon, which spends more as it faces higher costs and grows internationally. This led Baird analyst Colin Sebastian to lower his estimate of fourth-quarter operating profit for the e-merchant to $ 7.6 billion, from Street’s consensus of $ 8.1 billion.

“We assume that Amazon will remain focused on growing and expanding global services, which will require ingesting higher ‘frontline’ labor costs, transportation and logistics expenses (including including fuel and equipment inflation), product costs, as well as technology (servers, chips and network equipment, etc.), ”he writes. Amazon reports on October 28.

Apple’s profit estimate was also lowered by Needham analyst Laura Martin, who says while September’s earnings are expected to be good, the December quarter could be affected by declining iPhone sales. . Nonetheless, she still sees Apple as a buy. Only Microsoft seems to be heading for a quarter with no obvious issues. Apple’s results are expected on October 28; Microsoft, October 26.

Maybe the market downturn is really over. But with so much going on straddling just five stocks, we wouldn’t recommend getting comfortable until Big Tech has had a say.

Read more From top to bottom of Wall Street: The threat of stagflation haunts investors. This is how scared you should be.

Write to Ben Levisohn at [email protected]

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