Federal Reserve "Rate Cut Day": Tech Giants' Stocks "Sell the News"
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After the Federal Reserve delivered the long-anticipated rate cut, Wall Street did not indulge in celebration; instead, it staged a classic "sell the news" trade. Funds flowed out of overvalued tech stocks and into traditional sectors such as financials and utilities, which benefit from rate cuts.
According to Wallstreetcn, on Thursday the Federal Reserve cut rates by 25 basis points as expected, emphasized downside risks to employment, and projected two more cuts this year. The tech-heavy Nasdaq 100 index fell 0.2%, marking the worst performance among sectors, with the Tech Magnificent Seven index down 0.66%, ending a four-day winning streak.
At the subsequent press conference, Fed Chair Jerome Powell highlighted that inflation risks have "increased slightly" and described the move as a "risk management" rate cut. This stance further intensified the tech selloff, with the Magnificent Seven underperforming the other 493 S&P component stocks that day.
(After Powell stopped speaking, buying support narrowed the decline in the Magnificent Seven index)
A "Sell the News" Trade for Tech Giants
This pullback in tech stocks is widely seen as a correction to previous massive gains.
Ivan Feinseth, Chief Investment Officer at Tigress Financial Partners, said:
For growth stocks, some trades are "sell the news", because beforehand, strong expectations for rate cuts had pushed U.S. equities to record highs.
Data shows that since early April, a tech basket including Nvidia and Alphabet has surged nearly 60%, with forward P/E rising from about 22x to 30x. Ivan Feinseth added:
After a big rally, richly valued tech stocks deserve a breather. Furthermore, there are still many uncertainties about how tariffs will affect the economy.
In addition to "sell the news" trades, a rise in U.S. Treasury yields also weighed on tech giants' stock prices to some extent.
After the Fed statement, U.S. Treasury yields initially dropped but rebounded quickly following Powell's remarks, with the 10-year yield up 6.3 basis points and the 2-year up 5.62 basis points at day's end.
(Yield comparison for main Treasury maturities)
In theory, tech companies are especially vulnerable to rising Treasury yields because their valuations rely heavily on expectations for future years' profits, and higher yields lower the present value of these future profits.
It is worth noting that there was internal divergence among tech stocks.
Tech stocks sensitive to interest rates—such as Nvidia, Amazon, and Broadcom—all closed lower, while Apple and Microsoft, traditionally viewed as haven assets due to robust business models and cash generation, closed higher.
Traditional Sectors Benefit from Rate Cut Expectations
As tech stocks came under pressure, funds clearly flowed into sectors directly benefiting from falling interest rates.
Financials, consumer staples, and utilities became the best-performing groups in the S&P 500 for the day. These sectors typically offer generous dividends, attractive to income investors in a rate-cut environment.
Banks performed especially well. The KBW Bank Index rose 1.3%, with constituents including JPMorgan Chase, Bank of America, and Citigroup. Lower rates are expected to boost loan demand and reduce bank deposit costs.
Other corners of the market also reflected this shift in risk appetite. The Russell 2000 small-cap index rose as much as 2.1% intraday, ending up 0.2%. A Goldman Sachs basket of unprofitable tech companies gained 1.9%.
John Cunnison, CIO of Baker Boyer Bank, said that lower rates will support higher-risk stocks in the market, especially small caps and unprofitable tech companies. However, he also warned:
While a deep recession looks unlikely, after a rally, current valuations for growth and large tech stocks appear too high.
Despite sector rotation in the market, there was no sense of panic. The so-called "fear index" of Wall Street, the Cboe Volatility Index (VIX), fell below 16, far lower than the 20 level usually seen under market stress.
On Wednesday, the S&P 500 fell just 0.1%, marking one of the smallest swings on a Fed decision day in at least two years. Looking ahead, John Cunnison believes:
The bigger question traders now face is what all this means for future rate cuts and the economic outlook.
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