Understanding the tech rally: Wall Street earnings, inflation and technicals

Tech stocks are coming back to life after a long and drawn out correction. The S&P/ASX 200 Info Tech Index has rallied 20% from mid-June lows and up 3.9% on Tuesday to a 6-week high.

Wall Street has handballed us a very strong session, with heavyweight tech names like Wisetech (ASX: WTC), Xero (ASX: XRO) and Block (ASX: SQ2) all up around 5% at noon. 

Let’s break down some of the moving parts in this tech rally. 

Wall Street earnings: Not great but good enough

US quarterly earnings season is underway and several heavyweight names like Bank of America, Wells Fargo and Netflix have set a ‘better-than-feared’ tone for reporting season.

In the second quarter, Bank of America earnings fell -32%, Goldman profits slumped -48% and Netflix lost almost 1m subscribers, the most in the company’s history. Still, the share prices of all three companies rallied post results and the earnings were actually ahead of analyst expectations.

Taking a closer look at Netflix, the stock is down -66% year-to-date and copped a significant -35% single-day selloff on 20 April. This was in response to the company’s first-quarter results, where the streaming platform said it expects to lose 2m subscribers in the second quarter. 

After playing the ‘underpromise and overdeliver’ card, losing 1m subscribers sounds like a massive win. 

This could be a theme to take note of as the ASX kicks off reporting season next month.

Inflation expectations

In the near-term, investors are bracing for major central banks to front-load interest rate hikes at pretty much every single meeting until the end of the year.

Conversely, inflation expectations are starting to grind lower, with the US University of Michigan survey reporting 5 and 10 year inflation expectations falling to 2.8% (from recent highs of 3.1%).

The Bank of America fund manager survey showed inflation expectations are now close to the lowest on record and expectations of higher short-term interest rates has started to wane.

Easing inflation expectations could support a more neutral or dovish view from central banks, which supports interest rate sensitive tech stocks.

Source: Bank of America

Tech Index technicals

The ASX 200 Info Tech Index remains in a downward trend.

Encouragingly, the 20-day (red) and 50-day (green) moving averages are beginning to slope upwards.

The Tech Index needs another 3-4% to hit the upper bound of the downward trendline, which has proven to be a key area of resistance.

S&P/ASX 200 Info Tech Index (Source: TradingView, Annotations by Market Index)