S&P 500 tumbles to low-4700s as big tech/growth stocks battered after surprisingly hawkish FOMC minutes trigger QT fears

• The S&P 500 tumbled nearly 1.5% and the Nasdaq 100 is down more than 2.5% after hawkish Fed minutes.
• Though Fed’s Waller jawboned about QT in December, markets seemed surprised by the support for a sooner, faster start.

US equity markets are tumbling across the board, though the pain is concentrated most heavily in big tech, so-called growth, and real-estate names, pretty much those sectors most sensitive to a rise in US bond yields. The catalyst for the downside was the latest Fed minutes release, which seemed to catch a number of market participants off guard with regards to its hawkishness on the prospect for quantitative tightening and rate hikes in this year. To summarise, the minutes mostly echoed Powell’s remarks following the Fed’s hawkish December policy shift (where the QE taper pace was doubled and the dot-plot pointed to three 2022 hikes). But markets were surprised by the extent to which meeting participants agreed with the notion that quantitative tightening (where the Fed reduces it balance sheet) should start sooner and proceed faster than in past cycles.

The S&P 500 dropped 1.4% as index heavyweights Apple (-1.8%), Microsoft (-3.0%), Alphabet (-3.7%), Facebook (-2.9%), Netflix (-3.3%), Telsa (-3.9%) and others tumbled. The index broke below a key area of support around 4750 and is now probing the 4720 mark, where it trades at its lowest since before Christmas. Losses in the aforementioned big tech/growth stock names were primarily as a result of US bond yields breaking higher, particularly at the short to medium end, in anticipation of a higher Fed rate path in the coming years. Remember that these stocks disproportionately derive their value from expectations for future earnings growth rather than current earnings, so when “opportunity cost” (which bond yields are a proxy for) on betting on future earnings growth rather than present earnings goes up, these stocks fall.

Stocks in sectors seen as more defensive in nature, such as in health care, consumer staples, utilities and telecoms held up better. Many of these stocks are also often classed as “value” stocks, i.e. stocks whose value is based more on present earnings rather than future, leaving them less vulnerable to a rise in bond yields. For reference, the S&P 500 health care index was down just 0.3%, consumer staples was up 0.2%, utilities was up 0.3%, whilst telecoms was up more than 2.0%. Despite higher yields, the S&P 500 financials index was still down 0.7%. As a result of the underperformance of tech and growth names disproportionately represented in the Nasdaq 100, the index tumbled over 2.5% to the 15.8K area, where it now trades lower by nearly 3.0% on the week. Meanwhile, the Dow also tumbled 0.6% to test the 36.5K mark, with its losses comparatively mild given its higher weighting towards the aforementioned sectors that are holding up a little better.