Tech stocks enjoyed a surprisingly strong day in the markets after Friday’s unfortunate tumble. Indeed, even as Dow Jones Industrial Average notched a 0.4% loss, the tech-centric Nasdaq Composite rallied 1.8%. Tech companies across the board gained today seemingly as a response to recent recession news.
The market is in a strange place today. It seems investors are caught in a mix of fear and greed as the possibility of a recession weighs on consumers. The Atlanta Federal Reserve’s GDPNow indicator is currently predicting a roughly 2.1% drop in U.S. GDP in the second quarter. Given U.S. production fell 1.4% in Q1, should the Fed’s Q2 estimate prove accurate, the U.S. would technically be in a recession.
This may largely be what’s behind today’s tech stock jump. Investors have always known the potential for rate hikes to spark a wider economic downturn. Few would have guessed the recession would materialize so quickly and aggressively. As such, the Atlanta Fed’s estimate may read as a sign the Federal Reserve will be a bit more conservative in its upcoming policy meetings than previously expected.
Tech companies — and high-growth stocks in general — are particularly sensitive to interest rates due to their typically highly leveraged nature. The higher rates are, the lower their future predicted earnings. For many tech companies, these future earnings are the basis for their valuations. As such, when the first round of interest rate hikes hit, tech and growth stocks largely took the brunt of the impact.
Tech Stocks Climb on Potential China Tariff Pause
Tech stocks may also be climbing from a recent Wall Street Journal report on possible tariff relief. Indeed, news broke that President Joe Biden is considering easing some of the import tariffs levied on China under former President Donald Trump as a way to curb inflation.
This reads as a strong sign for tech stocks, which would likely benefit from the reduced trading costs. China is one of the largest markets for high-tech goods like smart phones, electric vehicles, and other semiconductor-dependent products.
Investors are clearly ahead of the curve on the promising tariff pause rumor. Companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Meta Platforms (NASDAQ:META) and PayPal (NASDAQ:PYPL) closed up more than 4% today as investors hedge their bets on a kinder monetary environment.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.