The key drivers of the late 2023 stock market rally have faded.
With investors increasingly questioning when the Federal Reserve will cut interest rates, the so-called soft landing trade that saw investors pour into interest rate-sensitive sectors has stumbled to start 2024.
That raises the question of what the next catalyst is — and investors may not need to look further than the Tech sector (XLK). Despite the recent craze over small caps and other hot trades that could benefit from the Fed's interest rate cuts, technology earnings over the next few weeks will still be key to bringing the market out of its January slump.
To Keith Lerner, the co-chief investment officer at Truist, it's a simple math equation. With the tech sector representing nearly 30% of the S&P 500, by far the largest portion of any of the 11 sectors, and the "Magnificent Seven" tech stocks alone comprising nearly 30% of the index's market cap, movements in those areas remain crucial for investors in the broader indexes.
"With the concentration that you still have, I think, tech showing the earnings and the ability to grow earnings at a good pace, even if we have a step down in growth, is very important to keep this market moving forward," Lerner told Yahoo Finance on Wednesday ahead of tech earnings.
Taiwan Semiconductor (TSM) took the lead role on Thursday as the chipmaker, which supplies to the likes of Apple (APPL) and Nvidia (NVDA), reported quarterly results before the opening bell that beat estimates and propelled the stock nearly 10% higher.
The company's adjusted earnings per share of $1.48 came in higher than Wall Street's expectations of $1.38. And, perhaps more importantly, the chipmaker said artificial intelligence is fueling its success. Taiwan Semiconductor said it expects revenue to grow 20% in 2024 due in part to AI demand.
The news sent the semiconductor index (^SOX) more than 3% higher, while Nvidia (NVDA), whose weighting in the S&P 500 is nearly as big as the entire Energy sector, shot up over 2% before paring gains.
The move in semiconductors, combined with an upgrade on Apple (AAPL) stock from Bank of America, sent shares of the iPhone maker up more than 3% for its best day since May. Analyst Wamsi Mohan moved his rating to Buy from Neutral and bumped his price target to $225 from $208, citing artificial intelligence and the new Vision Pro headset as key drivers.
Stock moves in Apple and chips sent the tech-heavy Nasdaq (^IXIC) up more than 1.3% on Thursday, while the S&P 500 (^GSPC) added nearly than 1%.
The research from BofA marked a reversal in the recent narrative on Wall Street in which analysts turned bearish on Apple amid questions about iPhone demand, among other issues. And it comes at a critical point ahead of Apple's earnings release, slated for Feb. 1.
Other tech giants are also expected to report in the next two weeks, beginning with Netflix on Jan. 23, and Wall Street strategists expect those reports to serve as a critical juncture for the market.
"Companies have cut costs throughout the earnings recession," BofA equity strategist Ohsung Kwon told Yahoo Finance in early January about what could drive stocks higher. "They have managed margins. Margins went up for the second straight quarter. So I think the momentum is to the upside, and if companies talk more positively this earning season, given that the rate pressure and the macro uncertainty has eased somewhat, now, that's going to be bullish for equities."
For now, technology is the sector checking those boxes and leading the averages higher with it.
Josh Schafer is a reporter for Yahoo Finance.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance