Tech shines, cyclical traders lose when they bet on asymmetric growth shocks

Instead, they’re concentrated in the tech behemoths that fueled the market’s boom in the years after the 2008 financial crisis. And they typically ignore stocks that are considered cyclical or sensitive to the economy’s performance. The S&P 500’s materials, real estate and industrials sectors are down at least 4 percent over the past month.

The S&P 500 has been relatively resilient in the wake of the banking crisis, up 1.1% over the past month, but further moves have been seen below the market floor.

Spreads across the index, a measure of how individual stock returns are spread, rose to 31% at the end of March from 23% a month earlier, according to S&P Global. The March reading is historically above the 75th percentile. The higher the percentage variance, the more likely stock returns are to diverge.

“Stronger credit standards create winners and losers,” said Sean Sun, portfolio manager at Thornburg Investment Management. “Technology companies don’t need loans to grow. Cyclical and some other industries do.

Last month, deposits poured in from small and medium banks. It is expected that loans will decrease because banks need deposits to give loans. Banks are expected to build larger cash reserves and take fewer risks on future loans as they work to regain investor confidence. That keeps some companies from getting the credit they need to grow their business.

In turn, Fed officials have acknowledged that tensions in the banking system could end their rate hike campaign, more than expected a few weeks ago.

Both factors are expected to be beneficial for big tech companies: they have more cash on their balance sheets than other industries and are less dependent on loans. And investors are willing to pay more for shares of companies they expect to generate higher profits in the future, growing in low-cost areas.

Apple Inc.

Shares rose 26 percent in 2023 and 8 percent last month. Microsoft Corporation

It grew 20% and 12% during those periods. Both companies have tens of billions of cash on hand.

Despite falling last year, tech stocks are still trading at higher levels, making them vulnerable in the event of an economic downturn. The technology sector is trading at 24.5 times forward earnings over the next 12 months, while the communications services sector is trading at 16.6 times forward earnings. By comparison, the S&P 500s multiple is about 18.2.

The S&P 500’s information-technology and communications-services sectors — both large tech stocks — rose more than 6% last month. The tech-focused Nasdaq-100 index has been trading higher since August and recently broke out of a bear market, rising more than 20% from its December lows.

Dominic Wilson, Goldman Sachs Group, said: “The market is defining its view of what this monetary tightening will mean for credit tightening. Inc

Chief Market Economist, wrote in a note to clients last week. “Growth from credit constraints will be enough for the Fed to change monetary policy significantly, but it will be heavily concentrated in credit-intensive areas, particularly from smaller banks.”

Companies that make up the S&P 500 have more sources of financing and less direct exposure to regional bank lending. Still, the decline in lending to small firms could reverberate through the economy and be felt by large firms in cyclical industries.

As such, the share of smaller companies has fared worse than their larger counterparts. The S&P 600, an index of small-cap stocks with a market capitalization of between $750 million and $4 billion, fell 8.5% last month. The middle end of the index fell by 6.6%

Bond markets also rallied quickly, with traders now confident the Fed is nearing the end of its rate hike cycle. The two-year Treasury yield, typically the benchmark for short-term rates, rose more than 5% on March 8 and has since fallen to 3.761%. Interest rate futures traders are currently pricing in a 54% chance that the Fed will leave the policy rate unchanged at its next meeting in May, according to the CME Group.

Although tighter credit standards are difficult to gauge in the short term, Wall Street is quickly adjusting forecasts for the Fed’s terminal policy rate and overall economic growth.

Analysts at BNP Paribas SA said they expect the federal funds rate to drop to 5.25%, from their previous call of 5.75%, due to the impact of tighter bank lending standards on US growth. Analysts at Goldman Sachs have raised their odds of a US recession in the next 12 months from 25% to 35% due to changes in credit ratings.

To be sure, analysts at Moody’s Investors Service said in a report this week that there are no signs of a bank credit crunch so far. Despite tight funding conditions for banks, there has been no significant decline in loan growth compared to February levels, the company said.

“Right now, the stock market is trying to fight this battle between expectations of lower rates and fears that the economic slowdown will actually intensify,” said Yung-Yuma, chief investment strategist. BMO Wealth Management.

Write to Jack Pitcher at jack.pitcher@wsj.com