The turnaround in fortunes for many US large cap stocks has been rapid and, in some ways, surprising given it has occurred at the same time as a banking crisis and increased market volatility.

Since the start of the year the Nasdaq 100 index, comprised of the largest technology names by market cap, is up around 18% led by computer chip maker Nvidia (NVDA:NASDAQ) which has surged 76% over the last three months.

The Nasdaq 100 peaked in the autumn of 2021 after a deceleration in earnings momentum driven by a drop in online spending post-lockdowns. Many firms such as online giant Amazon (AMZN:NASDAQ) had overexpanded during the pandemic resulting in bloated costs.

Another negative factor was the rapid rise in interest rates beginning in the spring of 2022 which created a headwind for the valuation of big tech’s earnings. Lastly, an increase in the value of the US dollar lowered overseas earnings when translated back into US dollars.

These headwinds have recently eased and turned into tailwinds while big tech’s strong balance sheets look more attractive against a backdrop of financial market stress.

Aggressive cost cutting has been applauded by the markets. For example, Facebook owner Meta Platforms (META:NASDAQ) said it would cut 13% of its workforce and refocus on profitability and efficiency.

In total, Microsoft (MSFT:NASDAQ), Amazon, Meta and Alphabet (GOOG:NASDAQ) have made over 60,000 redundancies in the last few months as well as cutting back on corporate spending.

This hasn’t gone unnoticed by the market with analysts making big upward revisions to their current year earnings estimates. For example, Meta’s consensus earnings estimates have increased 25% over the last two months.

The outlook for interest rates has changed significantly since the US Federal Reserve’s last interest rate policy meeting on 22 March. Chairman Jerome Powell acknowledged the banking crisis could lead to a slowdown in bank lending and tighten financial conditions.

The Fed consequently changed its statement on the rates outlook from ‘ongoing’ rate increases to ‘some additional firming may be appropriate’.

The CME’s FedWatch tool based on interest rate futures is pricing in a 57% chance of a rate cut by July and an 85% chance of a cut by October 2023. The Fed’s summary of economic projections does not envisage any rate cuts until 2024.

There is a growing consensus that the rate hiking cycle is now close to its peak which would have positive implications for the rating of big tech and removing a key driver of last year’s underperformance.

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