How Big Tech Became The New Defensive Stock Game

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Crises make strange bedfellows. Just look at the new class of defensive stocks: Utilities, Consumer Staples, Health Care – and Big Tech.

In the past week, the

Technology Select the SPDR sector
The exchange-traded fund (ticker: XLK) was the market’s best performer, rising 6.3% followed by a 6.1% gain for the

Select communication services sector SPDR
ETF (XLC). The defensive

Utilities Select sector SPDR
ETF (XLU) climbed 4.1% followed by the

Consumer Discretionary Select Sector SPDR
ETFs (XLY) 3.6% gain.

In reality, however, technology has done the heavy lifting. Given the industry classifications, XLC includes big tech names like Google’s parent company

alphabet

(GOOGL) and Facebook Parents

meta platforms

(META), which are up 12.8% and 10% respectively over the past week while XLY is at home

Amazon.com

(AMZN), up 10.1% for the week and

Tesla

(TSLA), which rose 7.5%.

That makes three of the four best-performing sectors this week tech-centric, although large market swings fueled by banking worries prompted investors to seek cover in relatively safe havens. Aside from the surge in utilities, the

Healthcare Select Sector SPDR
ETF (XLV) climbed 1.7% and the

Consumer Staples Select the SPDR sector
ETF (XLP) gained 1.5%, making them the fifth and sixth best performers. Gold prices also jumped nearly 6%, posting their biggest one-week percentage gain in nearly three years, and silver was similarly strong.

That’s a marked shift from what investors are expecting: In 2022, like many other bear markets, riskier, growth-oriented sectors like technology were hammered as investors clamored for everyday steady-eddie performers.

But it also makes sense considering Big Tech players like unlike startups

Apple

(AAPL), Alphabet and

Microsoft

(MSFT) are sitting on huge hoards of cash, making them much less vulnerable to a potential balance sheet downturn. The first two also pay a small dividend – once anathema to technology but part of the appeal of defensive plays like Provisioners and Staples.

Additionally, their bread-and-butter businesses don’t appear to be threatened by banking troubles. On Friday, KeyBanc Capital Markets analyst John Vinh noted that February sales of iPhones and Apple hardware were “moderately better than normal seasonality, reflecting robust demand and improving supply.”

Likewise, Morningstar analyst Ali Mogharabi wrote earlier this week that the turmoil “should not result in any material impact on online media or advertisers under our coverage and we are not adjusting our fair value estimates for these stocks.”

He notes that a fall in Google’s cloud storage revenue would likely be less than 10% and have minimal impact on the company’s overall profitability, as venture capital funding for startups would likely resume next year.

At the same time, this momentum – which has given Big Tech such a boost – is also downright positive for consumer staples, which is a rare occurrence.

While staples benefit from the typical flight to safety, they also get a boost from the fact that they don’t have ties to struggling institutions like Silicon Valley Bank, as some of their disruptor competitors did.

“[A] A significant number of industry start-ups have had exposures to SVB and in addition to the associated short-term disruptions, tighter later lending standards and a greater emphasis on free cash/profitability are likely to further limit the ease with which small businesses can obtain funding and enter the industry,” wrote John Baumgartner, analyst at Mizuho Securities.

Last but not least, the last few years have taught investors to expect the unexpected. At least for now, both iPhones and ice cream offer protection from the storm.

Write to Teresa Rivas at teresa.rivas@barrons.com