Tech giants Apple and Microsoft experienced declines in the month of August, which also impacted the broader S&P 500. The market’s decline can be attributed to rising interest rates, as well as disappointing guidance from Apple and Microsoft. While it is unusual for the S&P 500 to decline for two consecutive years, experts remain optimistic about its return in 2023.
Apple Inc. (NASDAQ: AAPL) ended August with a loss, marking its first decline since December. Similarly, Microsoft Corp. (NASDAQ: MSFT), the second-largest component of the S&P 500 after Apple, also ended in negative territory for the months of July and August. However, both companies had recorded gains in the months leading up to this decline.
Given their significant influence on the market, there is speculation about whether these tech behemoths are dragging down the broader market and the tech sector specifically. To gain a better understanding of the situation, let’s examine the performance of various sectors within the S&P.
Tech remains the top-performing sector year-to-date, primarily due to the impressive 237.72% gain of Nvidia Corp. (NASDAQ: NVDA). The second-best performing sector is communications services, led by Meta Platforms Inc. (NASDAQ: META) with a return of 145.88%.
The so-called Magnificent Seven stocks, which include Apple, Nvidia, Microsoft, Amazon.com Inc. (NASDAQ: AMZN), Meta, Tesla Inc. (NASDAQ: TSLA), and Alphabet Inc. (NASDAQ: GOOGL), have contributed to more than 75% of the S&P’s return through July. While August marked only the second month in 2023 that the S&P closed lower, the decline was just 1.63%, which is not a cause for panic. In fact, it is reasonable to expect a pullback after a 19% gain.
Furthermore, sector rotation is a normal occurrence in the market. In the past month, nine out of the 11 S&P sectors experienced a pullback, but the Energy Select Sector SPDR Fund (NYSEARCA: XLE) saw a gain of 4.21%, and the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) had a small return of 0.09%.
Despite the strong rally in 2023, the market has not fully recovered to its January 3, 2022 high. Some analysts believe that the S&P won’t enter bull market territory until it surpasses that level. However, the market’s gain of 1.45% on August 29, accompanied by heavy trading volume, indicates a continuation of the rally that began on August 18, which is considered a bullish sign.
Both Apple and Microsoft issued weaker-than-expected revenue guidance, leading to their pullback in late July and August. However, it’s important to note that bond yields also played a role in the market’s decline. The rates on 10-year and 20-year Treasuries increased in August, providing investors with attractive returns on bonds and cash holdings. As a result, there is less incentive to take on the risk of equities. The Federal Reserve’s efforts to curb inflation may be more responsible for the market’s decline in August than the performance of Apple or Microsoft.
Nevertheless, the tech sector typically faces challenges when interest rates rise because it becomes more expensive for companies to borrow and finance new projects. While it is true that Apple, Microsoft, and other tech companies have no trouble finding lenders, they would still have to pay higher interest rates on newly issued debt.
While uncertainties surrounding interest rates, China’s economy, the U.S. job market, and other factors have the potential to impact stock prices, it is uncommon for the S&P to close lower for two consecutive years. Historically, the market tends to self-correct, and significant declines often attract value-oriented investors looking for bargains.
As sectors other than tech continue to emerge as leaders in the S&P, their impact on the index’s performance increases. This means that the index becomes less reliant on the performance of even the largest stocks such as Apple and Microsoft.
