By David Randall

NEW YORK, (Reuters) – Markets have been shaken by signs that the Federal Reserve is ready to go all out in fighting inflation. Investors are readjusting their portfolios in response to this change.

The benchmark 10 year U.S Treasury yield is on track to record its largest weekly gain since September 2019, as technology and growth stocks tumble and investors snap up shares in banks and energy companies.

This action recalls how the markets began 2021 when vaccines against the coronavirus raised expectations for an economic recovery in the United States. While yields declined later in 2018, the rally in economically-sensitive shares slowed, and investors returned back to big tech and growth stocks which have led markets higher over the past decade.

Investors must consider the Fed’s likely increase in rates this year, as it fights rising consumer prices. Higher borrowing costs may impact growth and tech stocks. The Value index has gained around 1% for the year to date, while the S&P 500 Growth index has fallen around 4%. Recently, the index as a whole was down by around 1.7%.

Gabelli Funds portfolio manager Bob Leininger expects this trend to continue. He is focusing his portfolio more on financials and energy stocks as well as aviation stocks like Boeing (NYSE:) Co, in anticipation of a wide resurgence of global travel.

He stated that the Fed was serious about ending quantitative ease. “This year will see the beginning of quantitative tightening, which will be favorable for value stocks.

Investors tend to view a Fed that is hawkish with caution. However, equity prices have risen during previous rate-hike cycles. The S&P 500 has risen at an average annualized rate of 9% during the 12 such cycles since the 1950s and showed positive returns in 11 of those instances, according to data from Truist Advisory Services.

Lew Altfest is the chief executive officer of Altfest Personal Wealth Management. He stated that there are expectations that the Fed would raise interest rates at minimum three times per year in 2022. This will reduce speculation.

He said that this will impact both high-growth tech shares and deep-value sectors such as travel and energy, which saw huge gains in 2021.

Altfest is now focusing on bank companies, where he anticipates that they will benefit from higher interest rate trades at relatively lower valuations while still holding positions in technology-focused giants.

The S&P 500 bank sector was recently up more than 7% year-to-date and trades at a trailing price to earnings ratio of 11.5, compared to a 26.1 price to earnings ratio for the broader index.

Banks “just look more rational,” Altfest said.

In the coming week, investors will have a better look at earnings from banks as several big banks including JPMorgan (NYSE) and others. Citigroup (NYSE) is expected to announce their quarterly results.

Some believe the heavy weighting of tech-focused stocks in the S&P 500 could slow the broader index if those names stumbled: Microsoft (NASDAQ:), Apple (NASDAQ:), Nvidia (NASDAQ:), Alphabet (NASDAQ:), and Tesla (NASDAQ:) accounted for nearly a third of the S&P 500’s almost 29% total return last year, according to data from UBS Global Wealth Management.

Although many large tech stocks were hit recently, the impact on smaller tech companies that rallied early in the pandemic has been more severe. The ARKK Innovation ETF is the worst performing equity fund for 2020. It has already fallen 11% over the past year.

Some investors are also betting on tech stocks as they will outperform other segments of the market over time.

Harbor Capital Advisors managing director Ross Frankenfield has increased his allocation to financials with larger caps but anticipates that momentum will shift to tech megacap stocks later this year, as economic growth slows in 2023.

He stated that while there is good value in short-term stocks, we believe mega-cap growth stocks will continue to be attractive long-term once earnings become more difficult.