Will weakness in Magnificent 7 stocks spread to Bitcoin price?

The mega-cap tech stocks, which saw a robust start in 2023, are now grappling with massive trillion-dollar losses, leaving their shareholders concerned. Wall Street’s unease over surging bond yields and higher interest rates has cast a shadow on these companies. Traders are now pondering the potential impact on Bitcoin (BTC) if the S&P 500 downtrend continues.

Consequently, investors must investigate the correlation between Bitcoin and the S&P 500 and consider whether cryptocurrencies can thrive in an environment of high-interest rates.

The seven largest tech companies, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla, collectively constitute a staggering 29% of the S&P 500, marking the highest concentration ever recorded in this stock market index. However, since the end of July, these tech giants have witnessed a substantial erosion in their market value, with a staggering $1.2 trillion loss.

Real Money’s James DePorre notes that “73% of stocks in the market are more than 20% below their highs,” which technically defines a bear market. This underscores growing worries in the broader economy apart from the top-7 stocks.

In its endeavor to regain credibility in combating inflation, the Federal Reserve has indicated its intention to maintain higher interest rates for an extended period. Crescat Capital warns that a significant decline in the S&P 500, coupled with a widening of corporate credit spreads, could elevate the likelihood of an economic downturn.

Higher interest rates impact stocks and commodities

Crescat Capital has also raised concerns about the wave of corporate and sovereign debt maturing in 2024, which will necessitate refinancing at substantially higher interest rates. They recommend exposure to commodities due to their historical resilience during inflationary periods, exacerbated by the challenge faced by commodity producers in investing in fixed assets.

Despite the vast difference in market capitalization, totaling $10.5 trillion for Apple, Microsoft, Google, Meta, Nvidia, and Tesla, compared to cryptocurrencies (excluding stablecoins), which fall short by over 9 times, there are some intriguing parallels.

First, both markets exhibit a scarcity quality that correlates with the monetary base. In essence, both react similarly to the actions of the U.S. Federal Reserve, where increased circulation benefits scarce assets, while a restrictive policy with high interest rates favors fixed-income investments.

Additionally, the trend toward digitalization has transformed the way people use apps and mobile services, particularly in financial services. Given the limited adaptability of traditional providers, often due to regulatory constraints, it’s not surprising that the public is embracing cryptocurrencies, even in the form of stablecoins. The growing demand for fully digital services is a secular trend that positively influences both the crypto and tech sectors.

Decoupling of the S&P 500 and cryptocurrencies

The performance of the top seven S&P 500 stocks can decouple from cryptocurrencies regardless of the time frame. Currently, Bitcoin is trading approximately 50% below its all-time high, while Apple and Microsoft are down 13% and 7% from their peaks, respectively. This discrepancy is partly due to investor concerns about a looming recession or a preference for companies with substantial reserves, whereas cryptocurrencies, excluding stablecoins, lack cash flow or earnings.

From an investment standpoint, stocks and cryptocurrencies inhabit different realms, but this contrast underscores how Bitcoin can grow independently of retail adoption and spot exchange-traded funds (ETFs), as evident by Microstrategy’s $5.4 billion direct investment in the cryptocurrency.

Related: ‘Sodl’ too soon: US gov’t missed Bitcoin gains now total $6B

The top seven tech companies hold a combined $596 billion in cash and equivalents, enough to purchase the entire circulating supply of Bitcoin, assuming 3.7 million coins are lost forever. Furthermore, these companies are projected to generate $650 billion in earnings within the next five years. So, even if those companies continue to decline, their cash position could eventually shift to commodities including Bitcoin.

Meanwhile, the U.S. housing market, another pinnacle of savings for the economy, is facing problems of its own due to record high mortgage rates. Sales of previously owned homes in September dropped to the slowest pace since October 2010, according to the National Association of Realtors.

Ultimately, a downturn in the S&P 500, whether driven by mega-cap tech stocks or other factors, may not necessarily spell doom for cryptocurrencies. Investors often seek diversification to mitigate risk, and Bitcoin’s low correlation with traditional markets, along with early signs of trouble in the real estate sector, offers an attractive condition for alternative hedges, as signaled by legendary investor Stanley Druckenmiller.