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Meta and Alphabet helped communication-services ETFs outperform past week despite Fed rate-hike bets.
Slower AI development could shift investor interest from chips to software platforms.
XLC's 12.95X forward P/E is well below XLK's 25.63X, highlighting a cheaper valuation.
Markets have been wavering lately as participants are holding their breath to study every bit of the Fed-related news. The broader tech sector has slumped even steeper than the S&P 500 (down 0.5%) over the past five days, with State Street Technology Select Sector SPDR ETF (XLK - Free Report) shedding about 0.7%, as the sector is rate-sensitive in nature and underperforms in a high-rate environment.
However, Telecom Services ETF Vanguard (VOX - Free Report) (up 2.64%), Fidelity Telecommunication MSCI ETF (FCOM - Free Report) (up 2.64%) and S&P 500 Communication Sector SPDR (XLC - Free Report) (up 1.9%) rose during that period. These ETFs are heavy on Meta (META - Free Report) (up about 3%) and Alphabet (GOOG - Free Report) L, (GOOG - Free Report) (up about 4%), both of which outperformed the broader market over the past five days
Meta and Alphabet have company specific catalysts and relatively resilient cash flows that allowed them to decouple from the most rate-sensitive parts of the tech sector like semiconductors. Hence, communication services ETFs that are heavily weighted to META/GOOGL/GOOG benefited even as rate-hike odds stayed elevated over the past week.
Sector Rotation Inside AI/Tech on Slow Frontier AI Chorus
Major AI lab CEOs (Amodei, Altman, Musk) called for slowing frontier model development. OpenAI’s Sam Altman has also said the company “welcomes” safety requirements for frontier AI labs.
The market interpreted this as negative for hardware/chips (NVIDIA, other AI infra names) and relatively positive for software/platforms that can monetize AI without bearing the same capex intensity or regulatory overhang.
Meta specifically got a boost from the Muse AI agent launch and a clearer paid consumer AI monetization path. Alphabet similarly benefits from being seen as a core AI software/platform beneficiary, with strong search/ads cash flows and a large AI ecosystem.
Cash-flow Quality of Mega Caps
Even with about a 90% implied probability of a Fed rate hike priced in for the week, the market initially distinguished between highly rate-sensitive, long-duration, capex-heavy names (such as many chip and AI infrastructure companies), and mega-cap platforms.
The second category includes companies like Meta, Alphabet, Apple and Microsoft. These behemoths are better positioned to absorb higher discount rates while continuing to deliver strong earnings. Hence, now that the Fed has enacted a 25-basis-point rate hike, we expect these tech giants to feel less of the impact.
Inside Cheaper Valuation of Telecom Stocks
Telecom ETFs like XLC has cheaper valuation than the broader tech ETFs like State Street Technology Select Sector SPDR ETF (XLK - Free Report) . XLK trades at a forward price/earnings (P/E) ratio of 25.63X while XLC trades at a P/E of 12.95X, indicating almost half the valuation. Vanguard Communication Services ETF (VOX - Free Report) trades at a P/E (trailing 12 months) of 17.1X.
Bottom Line
Stocks with chances of higher AI monetization and companies with strong earnings growth are likely to outdo the increase in discount rates in the tech space.
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Image: Bigstock
Should You Rotate to Telecom & Software ETFs Now?
Key Takeaways
Markets have been wavering lately as participants are holding their breath to study every bit of the Fed-related news. The broader tech sector has slumped even steeper than the S&P 500 (down 0.5%) over the past five days, with State Street Technology Select Sector SPDR ETF (XLK - Free Report) shedding about 0.7%, as the sector is rate-sensitive in nature and underperforms in a high-rate environment.
However, Telecom Services ETF Vanguard (VOX - Free Report) (up 2.64%), Fidelity Telecommunication MSCI ETF (FCOM - Free Report) (up 2.64%) and S&P 500 Communication Sector SPDR (XLC - Free Report) (up 1.9%) rose during that period. These ETFs are heavy on Meta (META - Free Report) (up about 3%) and Alphabet (GOOG - Free Report) L, (GOOG - Free Report) (up about 4%), both of which outperformed the broader market over the past five days
Meta and Alphabet have company specific catalysts and relatively resilient cash flows that allowed them to decouple from the most rate-sensitive parts of the tech sector like semiconductors. Hence, communication services ETFs that are heavily weighted to META/GOOGL/GOOG benefited even as rate-hike odds stayed elevated over the past week.
Sector Rotation Inside AI/Tech on Slow Frontier AI Chorus
Major AI lab CEOs (Amodei, Altman, Musk) called for slowing frontier model development. OpenAI’s Sam Altman has also said the company “welcomes” safety requirements for frontier AI labs.
The market interpreted this as negative for hardware/chips (NVIDIA, other AI infra names) and relatively positive for software/platforms that can monetize AI without bearing the same capex intensity or regulatory overhang.
Meta specifically got a boost from the Muse AI agent launch and a clearer paid consumer AI monetization path. Alphabet similarly benefits from being seen as a core AI software/platform beneficiary, with strong search/ads cash flows and a large AI ecosystem.
Cash-flow Quality of Mega Caps
Even with about a 90% implied probability of a Fed rate hike priced in for the week, the market initially distinguished between highly rate-sensitive, long-duration, capex-heavy names (such as many chip and AI infrastructure companies), and mega-cap platforms.
The second category includes companies like Meta, Alphabet, Apple and Microsoft. These behemoths are better positioned to absorb higher discount rates while continuing to deliver strong earnings. Hence, now that the Fed has enacted a 25-basis-point rate hike, we expect these tech giants to feel less of the impact.
Inside Cheaper Valuation of Telecom Stocks
Telecom ETFs like XLC has cheaper valuation than the broader tech ETFs like State Street Technology Select Sector SPDR ETF (XLK - Free Report) . XLK trades at a forward price/earnings (P/E) ratio of 25.63X while XLC trades at a P/E of 12.95X, indicating almost half the valuation. Vanguard Communication Services ETF (VOX - Free Report) trades at a P/E (trailing 12 months) of 17.1X.
Bottom Line
Stocks with chances of higher AI monetization and companies with strong earnings growth are likely to outdo the increase in discount rates in the tech space.