Why a Fed Rate Cut May Do Little for the Magnificent 7.

Technology investors are assessing the implications of the Fed's interest rate policy decision this coming week.

The Federal Open Market Committee will likely decide to begin lowering interest rates at its meeting on Sept. 18. According to the latest CME FedWatch tool, interest rate traders are predicting a 50% probability for a quarter-point cut and 50% for a half-point cut. As recently as Thursday, Fed-fund futures were indicating just a 28% chance of a half-point cut.

How much would a larger rate cut affect large technology stocks such as the Magnificent 7? The Mag 7 includes Apple $Apple (AAPL.US)$ , Microsoft $Microsoft (MSFT.US)$ , Google parent Alphabet $Alphabet-C (GOOG.US)$ , Amazon.com $Amazon (AMZN.US)$ , Nvidia $NVIDIA (NVDA.US)$ , Meta Platforms $Meta Platforms (META.US)$ , and Tesla $Tesla (TSLA.US)$ . The Roundhill Magnificent Seven ETF, which tracks the Mag 7, is up 35% this year, versus the 18% rise in the Nasdaq Composite. A large part of the return has been carried by Nvidia, with its 141% year-to-date gain.

Historically, interest rates have had a larger impact on growing technology stocks because most of their value comes from profit streams further in the future. With every rate hike, those future earnings become worth less in today's dollars, and with every rate cut, those future earnings become worth more.

However, rate cuts may not help Mag 7 stocks as much as they once might have. Barron's conducted a correlation analysis for the past few weeks on which index is most positively correlated to rising T-Bill prices, which equates to falling rates. The analysis found that the Mag 7 is less sensitive (0.43 correlation) than the Nasdaq 100 (0.52), which is less sensitive than the S&P 500 (0.56), which is less sensitive than the Russell 2000 (0.59). A correlation of 1 would mean an index moves in lockstep with falling rates.

It is also important not to overstate the impact of Federal Reserve interest rate policy. The biggest factor in driving stock prices, of course, is company-specific fundamentals. No rate cut is going to save shareholders from a large decline if a technology company misses earnings by a mile. The opposite is also true: If a company can handily beat earnings estimates because of company-specific product cycles, the stock will go up.

For Nvidia, for instance, the reception of its upcoming Blackwell GPU and whether Blackwell GPU products can drive large revenue growth for 2025 will be far more important than anything the Fed does.