From mid-February till mid-May, the stock market had a particular characteristic in which cyclical, value, financial, and energy stocks outperformed, while tech stocks underperformed. This market rotation was driven by strength in longer-term rates on expectations of accelerating economic growth and an accommodative Federal Reserve.
However, since mid-May, many tech stocks have started to outperform. The major factors were a rotation to growth stocks from value stocks while long-term rates started to back off in anticipation of the Fed's pivot to a more hawkish stance. Essentially, the Fed has deployed significant rhetoric and capital to signal that it is moving to a new inflation framework in which it will no longer raise rates in anticipation of inflationary pressure and only tighten or taper when inflation is significant enough on a "symmetrical" basis.
Any change in Fed policy, even on a subtle basis, tends to have major ramifications.
Here are 3 tech stocks that are breaking out:
To be clear only the top tech stocks are breaking out which increases the odds that this is a false move rather than a resumption of the trend.
Essentially since mid-May, NVDA is up 40%. This isn't that surprising considering that Nvidia is one of the leading tech stocks and chip manufacturers for a variety of growth industries including cryptocurrencies, cloud computing, video games, self-driving, etc.
If market conditions remain bullish, then Nvidia will outperform.
It's certainly working based on its earnings reports, and the stock breaking out to new highs. The stock has significantly more upside given that it always has the option to charge for its free product. Most likely, it won't have to do this especially given that investors are willing to pay a healthy premium for the stock.
This is a challenging market. The strength from mid-March has been fleeting and is more of a market rotation rather than a rally. Simply put, investors shouldn't chase this breakout given the weakness in broader market conditions. Most likely, it seems that the market rally from early March has reached its end stages. Now, we are beginning a correction, and investors should look to pick up high-quality stocks on the dip such as Cloudflare, Shopify, and Nvidia.