Technology stocks led the decline in the U.S. equity market on Wednesday as Federal Reserve chairman Jerome Powell signaled more interest rate hikes.
According to analysts, tech stocks are sensitive to changes in the interest rate outlook. Tech companies have a high borrowing need, which is significantly affected by interest rates.
The tech-leaning Nasdaq Composite sank 1.2 percent or 165.10 points, finishing at 13,502.20. The tech sector within the S&P 500 also posted a 1.41 percent decline to 3,003.82, being one of the biggest losers within the benchmark index.
Shares of Meta Platforms declined by 0.95 percent to $281.64, while Apple posted a 0.57 percent loss to finish at $183.96. Tech giant Microsoft also slipped 1.33 percent, closing at $333.56.
The S&P 500 index lost 0.52 percent or 23.02 points overall, closing at 4,365.69. The Dow Jones Industrial Average, which tracks the 30 most influential stocks in the U.S. market, ended the session at 33,951.52 after losing 0.30 percent or 102.35 points.
Analysts said Powell’s “hawkish” statement before the House Financial Services Committee on Wednesday had reduced risk appetite among investors. Powell told Congress members that the Federal Open Market Committee thought raising the benchmark lending rate “somewhat further” would be “appropriate.”
“You just have to make a judgment call on that, and that’s what we’ll be doing.”
Jerome Powell, Chairman of the U.S. Federal Reserve
Late in the trading session, Atlanta Fed President Raphael Bostic told Yahoo! News that the central bank should not raise the rate further to avoid “needlessly” weakening the economy. He pointed out that it would take time for the Fed’s monetary tightening cycle to “meaningfully influence” the country’s economic activities.
The Fed began hiking the interest rate in March last year to manage inflation. Earlier this month, the central bank decided not to increase the rate for the first time since the cycle began. The federal fund rate stands at the range of 5.00 to 5.25 percent today. Fed fund futures predict that the central bank will conduct a 25-basis-point hike next month.
Analysts have warned that the Fed’s monetary tightening campaign can tip the U.S. economy into a recession. Cherry Lane Investments partner Rick Meckler said the Fed was “walking a tight rope” between following its dual mandate and preventing problems in the banking system.
The high-interest rate in the U.S. contributed to banking turmoil last March, as noted by analysts. Some regional lenders experienced significant deposit outflows since the beginning of the year as businesses took out their cash reserves. The crisis began when California-based Silicon Valley Bank announced a sudden shutdown, citing the lack of liquidity.
Experts say the crisis in the regional banking sector may pose a long-term issue for the U.S. economy. Regional lenders are the main financing sources for small to medium businesses across the country. Their liquidity issues will further reduce credit availability for these business entities, leading to a decline in industry productivity.
AI to support tech stocks
Despite the recent decline in tech stocks, analysts predict that they will maintain an upward momentum on the hype over artificial intelligence (AI) technology.
London-based research firm Capital Economics forecasts that AI can help the S&P 500 hit 5,500 by next year. The firm’s global market team also projects that the U.S. benchmark index may breach the 6,500 level in 2025.
Capital Economics senior markets economist Thomas Mathews said the enthusiasm about AI would grow “even further” in the coming years. Earlier this year, Bank of America and RBC also predicted that AI would boost the S&P 500’s year-end price target. Meanwhile, Goldman Sachs said the market undervalued the S&P 500.
Major tech companies have increased their investment in their AI business, including Microsoft and Google-parent Alphabet. NVIDIA recently reported better-than-expected quarterly revenue of $11 billion. The chipmaker said its AI business contributed to most of the gains.