The end of the interest rate hike cycle, investors are starting to bet on large-cap technology stocks.

On Friday, Microsoft's stock price hit a new high, and Nvidia soared again. The Nasdaq and S&P continued to rise, and investors' enthusiasm was high. It seems that the US stock market has swept away the gloom brought by the weak US bond auction and the hawkish signals from the Federal Reserve on Thursday, and is thriving.

However, the main driving force behind this round of stock market gains comes from those companies with huge market capitalization, especially the tech giants that have benefited from the "AI dividend". Under the frenzy of the tech giants, there are hidden scenes of tragedy.

The performance of a large number of economically sensitive companies is disappointing, value stocks are retreating, small companies are plummeting, and stocks targeted by short sellers are showing their worst performance since March.

Data shows that although the S&P 500 index has risen more than 1% in the past five days, and the single-day increase on Friday was the best since June, its equal-weighted version (which effectively enhances the influence of non-large-cap stocks) has fallen.

In the Russell 2000 index (representing companies most dependent on bank financing), small companies have experienced the largest decline since September.

There is evidence that credit anxiety continues to plague Wall Street in this turmoil. Data compiled by Goldman Sachs shows that companies with strong balance sheets have shown a performance advantage over companies with relatively weak balance sheets. At the same time, high-yield bonds have been declining.

This became apparent on Thursday. Wall Street News mentioned that the US 30-year Treasury bond auction was weak, and all demand indicators performed poorly. At the same time, Federal Reserve Chairman Powell reiterated that the Fed will "not hesitate" to further raise interest rates to fight inflation. As a result, the yield on 10-year Treasury bonds soared, and the S&P 500 index ended the trend that could have set the longest rising streak since 2004.

In summary, market volatility indicates that investors are deeply confused about the impact of the most aggressive interest rate cycle in forty years on returns, the economy, and corporate valuations.

Under the frenzy of large-cap tech stocks, all market anxieties are masked by the seemingly continuous rise of the weighted overall index. However, small businesses are still very sensitive to changes in the credit cycle.

Small businesses are still very sensitive to changes in the credit cycle

Although the Federal Reserve is in the most aggressive interest rate cycle in nearly forty years, by 2023, almost no large companies will be affected by interest rate hikes, thanks to cheap borrowing during the pandemic and strong corporate profits that are sufficient to withstand repayment risks.

Therefore, market analysis believes that a high-interest-rate environment is a "tolerable threat" for large US companies. Data compiled by J.P. Morgan Asset Management shows that the overall free cash flow of US companies is nearly 11 times that of non-US companies in the MSCI Global All Country Index. In fact, since 2021, the net interest expenses of American companies have decreased by about 0.6% compared to their domestic total income GDI. According to Deutsche Bank data (excluding the financial sector), interest expenses in almost all other G10 countries have increased during the same period.

Phil Camporeale, a multi-asset solution portfolio manager at J.P. Morgan Asset Management, said:

"Despite tightening up to 550 basis points, the sensitivity of the US economy to interest rates remains low... The Fed is unlikely to change its stance until initial claims for unemployment benefits rise."

However, if we look beyond the giants, small businesses are still very sensitive to changes in the credit cycle. Although the net interest expenses of the corporate sector in the United States may decline, data from Societe Generale shows that the actual costs of companies outside the top 150 largest companies in France are actually rising.

Therefore, while investors are betting on large tech stocks, smaller companies have repeatedly suffered heavy blows to their stock prices in 2023, with discounts relative to giant companies like Apple and Microsoft approaching historic lows.

Marija Veitmane, a senior multi-asset strategist at State Street Global Markets, said:

"Unfortunately, this is not the case for the majority of companies, as they are increasingly facing the problem of rising interest expenses as they need to refinance their debts."