(Bloomberg) — They are safety stocks, pie-in-the-sky growth trading, and a play on fortress profit margins that have been draining cash for the past decade. Now megacap tech names have morphed into something else: market dogs.

All things considered, that’s not the worst news for bulls.

While stocks like Meta Platforms and Amazon.com have been blowing up throughout the year, something changed in the selloff this week. Not only did they collapse as bond yields fell steadily, but the rout coincided with another bullish market, a turn that could signal investors were getting better uses for their dollars. .

The sentiment was largely written in data on fast-money speculators, which showed managers such as hedge funds quickly retreating from the battered growth sector. Where is the money going? With a democratized version of the S&P 500 having just posted one of its best weekly gains since 2009, the answer appears to be: everywhere else.

The rotation helped extend another rally during the 2022 bear market, the seventh since January. While all previous recovery efforts have ended in vain, this episode, which has occurred against the backdrop of the steepest corporate collapse, is encouraging for Lori Calvasina, head of US equity strategy at RBC Capital Markets.

“The market is starting to move from areas where risk has yet to be priced into the areas where a lot of risk is already baked in,” Calvasina said on Bloomberg TV. “That’s what’s supposed to happen when you do bottom.”

With the exception of Apple Inc., their shares fell on earnings on the first day of the post in the Faamg bloc – including Amazon.com, Microsoft Corp., Google parent Alphabet Inc. and Meta formerly known as Facebook. Citing everything from a strong dollar to weaker demand, the once-firm companies are showing cracks.

The Big Five wiped out more than $250 billion in share values ​​this week, derailing the Nasdaq 100 even as more than 80% of the index’s members advanced.

By contrast, the S&P 500 Equal Weight Index, a version that strips out market cap bias and treats Apple the same as Alaska Air Group Inc., rose more than 3.5% for a second straight week together. Such big up weeks have only happened twice since 2009, during the post-pandemic rebound in 2020.

In fact, the equal-weight S&P 500 beat the cap-weighted, tech-heavy Nasdaq 100 by 3.4 percentage points, the most since January.

“We like the price action over the last few weeks despite some negative earnings reports,” Mike Wilson, chief US equity strategist at Morgan Stanley said on Bloomberg TV on Wednesday. “We think the market will pick up and that will be another positive catalyst because if the market doesn’t go down on bad fundamentals news, what do you have?”

In the opinion of Wilson, who was ranked as the best portfolio strategist in the latest survey of Institutional Investors, spillover among money managers and the potential for a peak central bank hawk set the stage for a rally that can last until the holiday seasons.

Amid tech earnings chaos and ahead of the Federal Reserve’s policy meeting next week, professional speculators are quickly withdrawing from the market. Hedge funds, which reduced equity exposure to multi-year lows during the 2022 selloff, reduced positions in both the long and short sides of their books from Monday to Wednesday, shedding risk bets at the fastest pace since March, data compiled by Goldman Sachs Group. prime brokers show inc.

A continued rotation out of tech giants is set to close a valuation gap with the rest of the S&P 500, providing a more stable base for the market. Despite the recession, Faamg shares traded at 25 times earnings, above a median multiple of 19 for the other 495 stocks.

It is probably a function of the fact that Faamg’s woes have not affected the extent to which investors have been able to light their positions, making them less vulnerable to selling.

Take hedge funds, which accelerated their departure this year. At the start of this week, Faamg shares accounted for about 11% of their overall net exposure in individual stocks, client data compiled by Goldman’s team including Vincent Lin show. That’s the lowest percentage since at least the start of 2019 and down from a peak of 18% seen in 2020.

With all the reflexes, cross-currents and feedback loops, easy storytelling has been countered by the stock market of 2022. Rather than evidence of a mass movement of money into value stocks, explanations for this week’s buoyancy include the idea that Reduced earnings play into the Fed’s goals to reduce inflation, and that enough wealth destruction has occurred in equities to begin reducing excess prices in the economy. .

Treasury yields fell during the week amid weak data from manufacturing to housing, with another set of yield curve inversions in a classic recession warning.

The looming economic downturn, however, is not a problem for equity investors who are willing to bid on seemingly cheap stocks whose valuations can be framed as worst-priced stocks.

The small-cap Russell 2000, for example, has risen for six straight days, notching its longest winning streak since March 2021. At the June low, the index was trading at 16 as much profit, on par with the trough multiplicity seen during the 2020 pandemic Crash.

For JPMorgan Chase & Co.’s sales trading team, one big fear among clients is missing the next big competition. For them, a dovish Fed and a lower-than-expected inflation print would more than offset any earnings weakness.

“Most of my clients are still playing the ‘don’t blow up’ song into the end of the year,” Matt Reiner, an equity sales trader at JPMorgan, wrote in a note earlier this week. “That tone will change to ‘let’s shoot’ if we grind a little higher and the pain is still there.”

–With assistance from Melissa Karsh, Lisa Abramowicz and Jonathan Ferro.

©2022 Bloomberg LP

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