Technology stocks have remained relatively insulated from the turmoil rattling financial markets. How long that lasts is anyone's guess.
The tech and communication services groups in the S&P 500 -- home to the likes of Apple Inc., Microsoft Corp. and the parent companies of Facebook and Google -- have climbed 2.3% and 2.9%, respectively, in March, extending their 2023 gains.
The sectors have been bright spots in a stock market battered by worries about the health of the financial system. A sharp drop in bank stocks has dragged the S&P 500 down 2% this month, trimming its gains for the year to 1.4%. The only other segments in the green for March are utilities and consumer staples.
The rise in tech stocks has coincided with a plunge in government bond yields and hopes that the Federal Reserve is nearing the end of its campaign raising interest rates. Among the biggest gainers in March are Facebook parent Meta Platforms Inc., which has jumped 13%; Salesforce Inc., which has surged 12%; and networking-equipment provider Arista Networks Inc., which has climbed 11%.
Tech stocks were clobbered last year when the central bank began its tightening campaign and the market environment turned to favor investments that generated immediate cash for the holder. Low yields, on the other hand, make many investors willing to pay more for shares of tech companies that they expect to churn out outsize profits in the future.
The yield on the 10-year Treasury note, which affects everything from auto and student loans to mortgage debt, has dropped below 3.5% from above 4% in early March. Monday's yield decline on the two-year note, which is particularly sensitive to investors' interest rate expectations, was the sharpest since Black Monday in 1987.
And in the derivatives market, investors say it is a tossup whether the Fed will raise interest rates by a quarter-point next week or hold them steady. Some traders are again calling for the central bank to cut rates later this year.
"The writing on the wall is that between the stress on the banking sector and some other economic data out there, we're getting to the end point here with respect to interest rate hikes," said Don Calcagni, chief investment officer of Mercer Advisors.
The bounce in tech stocks is surprising to some investors, given the spillover risks from the collapse of Silicon Valley Bank, a big lender to venture capitalists and technology startups. The failure of the bank, which underwent a run on deposits, was the second-biggest in U.S. history. Signature Bank and Silvergate Capital Corp., both players in the cryptocurrency industry, also failed in recent days. The crisis in confidence crossed the Atlantic on Wednesday when Credit Suisse Group AG shares plumbed new lows.
Sylvia Jablonski, chief investment officer at Defiance ETFs, said she isn't surprised by investors' renewed appetite for tech stocks, given how badly they were battered last year. The tech and communication services groups fell about 30% and 40% in 2022, respectively, compared with a roughly 20% drop for the S&P 500.
"Do they deserve to be down that much? Probably not," she said.
Within the tech sector, semiconductor stocks have been among the biggest winners of late, partly because of the reopening of China's economy. Intel Corp. and Advanced Micro Devices Inc. have added 14% this month.
The turmoil in the banking sector has increased the chances of an economic downturn, and some investors say that bolsters the case for holding tech stocks. Jason Pride, chief investment officer of private wealth at Glenmede, said he sees tech as one of the few areas of the market with the potential to post growth during a recession.
"Technology stocks tend to have more stable businesses and more downside protection during more difficult times," said Mr. Pride, who added that he is still cautious on the segment because valuations remain elevated, leaving the group vulnerable to further declines.
The tech sector is trading at about 22.5 times its expected earnings over the next 12 months, and the communication services sector trades at around 15.4 times earnings. In comparison, the S&P 500's multiple is roughly 17.3.
It is difficult to make any longer-term predictions about the market's trajectory because investors don't yet fully understand how the crisis in the banking sector will unfold, how quickly inflation will ease or how the Fed will respond, Mr. Calcagni of Mercer Advisors said.
"We still don't know if there is another shoe to drop," he said. "It's very conceivable that the gains we've seen in tech, we give those back. There's so much stress and so much concern in the market."