How are ASX 200 tech shares performing following the RBA rate hike?

On the heels of the RBA interest rate hike, the tech sector is far outperforming the financial sector.

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Key points

  • ASX 200 tech shares shrug off RBA rate rise
  • Technology stocks gained strongly in US markets yesterday
  • Investors may be bargain hunting amid the beaten down tech sector

S&P/ASX 200 Index (ASX: XJO) tech shares tend to be highly sensitive to interest rate levels, performing well in a low rate environment.

That’s because many of the big tech companies carry high price to earnings (P/E) ratios. Meaning they’re priced with growing future earnings in mind. And as the cost of future money goes up, those P/E ratios start to look stretched.

So, with the Reserve Bank of Australia (RBA) hiking the official cash rate by an unexpectedly sharp 0.5% yesterday, are ASX 200 tech shares selling off?

Not at all.

ASX 200 tech shares charging ahead

Somewhat counterintuitively, ASX 200 tech shares are leading the charge higher today, while the big banks are all deep in the red.

At the time of writing the S&P/ASX 200 Financials Index (ASX: XFJ) is down 2.6% while the S&P/ASX All Technology Index (ASX: XTX) – which contains some stocks outside of the top 200 – is up 1.5%.

That compares to a 0.4% intraday gain posted by the ASX 200.

Helping boost the tech index, the Xero Ltd (ASX: XRO) share price is up 2.2% today; shares in WiseTech Global Ltd (ASX: WTC) are up 2.8%; and the Block Inc (ASX: SQ2) share price is up 3.5%.

Why is the tech sector shrugging off the rate rise?

There’s no single reason why ASX 200 tech shares are outperforming today.

We suspect there are two prime drivers.

First, the Aussie market tends to follow the lead of United States markets. And the tech sector was a strong performer in the US yesterday (overnight Aussie time), with the Nasdaq closing up 0.9%.

Dual-listed Block – which acquired Afterpay in January – closed 1.5% higher on the New York Stock Exchange.

Second, investors may be looking past the immediate impact of a rate rise at the longer-term potential of these leading ASX 200 tech shares, all of which have been beaten down this calendar year.

How beaten down?

Despite today’s lift the WiseTech share price remains down 31.7% in 2022; the Block share price is down 34.0%; and the Xero share price has tumbled 43.9%.

So there could well be some bargain hunting afoot today.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc., WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended Block, Inc., WiseTech Global, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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