When Will U.S. Rate Cuts Help Techs?

On January 3rd, when the U.S. Federal Reserve cut its targets for key interest rates for the first time this year, analysts said companies would begin to see the results of lower borrowing costs in about six months, as the lower rates would spur corporate spending.

Technology was supposed to be a key beneficiary, as companies were supposed to take advantage of the cheaper interest rates to invest in new hardware, software and services.

Yet six months and six interest-rate cuts later, technology stocks are still in the doldrums, as corporations continue to hold off on investing in new software and systems. Technology companies are lowering their outlooks for the current quarter’s results, and analysts are not looking for any improvement in sector earnings until late this year at the earliest.

So what happened?

Multiple Woes

Analysts say the tech malaise is due to more than just a weak economy. A trough in the business cycle, a buildup in inventories that began late last year, the shakeout in the overextended dot-com economy, and the fact that most consumers and businesses now have the computer systems they need to function, are all holding profits back at technology companies.

Others say the Fed overestimated the resilience of the technology sector, which in happier times was quick to respond to interest rate cuts.

On Wednesday, Fed policymakers lowered the target for overnight loans between banks by a quarter percentage point to 3.75 percent, its lowest level in seven years. While the move disappointed some investors, who had hoped for a bigger cut, the Fed left the door open for further moves later on if the economy continues to show signs of weakness.

Misreading of New Economy

Analysts say the rate cuts will help the economy — but not necessarily this year.

Astrid Adolfson, financial economist at MCM Moneywatch, told the E-Commerce Times that original projections of a turnaround in six months were the result of a misunderstanding of the so-called New Economy.

Fed officials “assumed that because it was software they were looking at, rather than big plants (with lengthy production schedules), the turnaround would be quicker,” Adolfson said.

The rate cuts also coincided with a crash in the dot-com sector.

“There was such an overbuild in that industry, plus it was a new industry, and a lot of fallouts were also occurring at the same time,” Adolfson said.

No Pickup Before Q4

Sam Stovall, investment strategist at Standard & Poor’s (S&P), is not looking for any improvement in technology earnings until at least the fourth quarter.

“We’re now about six months away from the first rate cut, and we really have not seen any kind of a pickup in the economy,” Stovall said in a recent interview. “It looks as if it could take six months or longer.”

S&P is looking for a 51 percent year-over-year drop in technology company earnings for the quarter ending in June, followed by a 29 percent decline in the September quarter.

In the fourth quarter, however, Stovall said that stocks in the S&P technology index “might eke out a 4 percent gain.”

Unrealistic Time Frame

Adolfson noted that technology companies are particularly dependent on overseas revenue, but “overseas economies have been softening very, very severely, and some of the monetary authorities overseas have not been as aggressive as the Fed in cutting rates.”

As a result, Adolfson said, the Fed is probably looking at a more normal response time, and “normal response times to monetary easings are usually nine to 12 months.”

Companies, said Adolfson, will resume spending on technology as the manufacturing and financial sectors look to streamline their operations.

“They are moving more aggressively into technology,” she said. “Right now, while they are cutting costs, they are not going forward with those plans, but if the economy does pick up, and (consumer spending) picks up, then the companies will start buying again.”

1 Comment

  • Feels like we’ve been waiting for a tech recovery for a lot longer than six months.

    I guess we just need to define a recovery. What’s the stock-market target for six months, for 12 months, for 24 months, for 60 months. And just measure that against having your money in savings.

    Let’s get some specifics.

Leave a Comment

Please sign in to post or reply to a comment. New users create a free account.

E-Commerce Times Channels