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Big Tech rally will grow as recession worries reign, investors say

Apple iPhone 14 smartphones are displayed at the company’s store in the Gangnam District of Seoul on March 31.  (SeongJoon Cho/Bloomberg)
By Heather Burke Bloomberg

The Big Tech rally of this year has further to run as the risk of a U.S. recession drives investors into stocks that offer profitable growth in lean times, according to the latest Markets Live Pulse survey.

Some 41% of 492 market participants surveyed said the highest returns this year would come from buying quality stocks focused on profitability, while selling those that disappoint on those factors.

That includes taking long positions in companies such as Apple and Microsoft, which have surged as markets embrace growth and shy away from economically sensitive industries.

Investors are entering a new month with little clarity on interest rates and the economy.

That’s boosting the appeal of stocks with robust cash flows and promising revenue growth, even if they come with hefty price tags.

The tech-heavy Nasdaq 100 has clawed back more than half the losses it saw from an end-2021 peak through a low in 2022 and is gaining more momentum with the buzz around artificial intelligence.

Investor enthusiasm for AI is boosting stocks such as Nvidia, which is set to become the first chipmaker to achieve $1 trillion in market value.

“No one wants to stick their neck out,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “We are seeing an extraordinary captivation with U.S. large-cap tech that has been a big driver of investment for a long time.”

Quality easily beat momentum, value and low risk/volatility/beta in the MLIV Pulse survey as the winning strategy for buying stocks that score highly in a factor, while selling their opposites.

Some strategists are also turning more bullish. Citigroup last week raised tech to overweight and U.S. stocks to neutral, expecting a boost from AI and an end to the Federal Reserve’s rate hikes.

The rush to tech is making the trade more expensive. It’s the priciest among S&P 500 sectors, with Bloomberg Intelligence noting that valuation multiples are near the highest levels since the first quarter of 2022.

While survey respondents believe tech is going to outperform, “it’s not like it’s free lunch,” said BI U.S. quantitative equity strategist Christopher Cain. “A lot of times, that’s already priced in.”

Still, robust company commentary is supporting the optimism so far. Nvidia, which makes the chips needed for complex AI computing tasks, has surged after it gave a revenue forecast that stunned Wall Street with the scale of the upside.

And mutual funds have largely stayed on the sidelines of the rally, suggesting further buying potential.

In the broader market, where the S&P 500 has been stuck in one of the tightest trading bands in years, a majority of survey respondents expect modest moves or no gains from here on.

“We do expect a recession to begin sometime in the second half,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI. “And for the equity market, that means down first, and then likely back up, essentially to here.”

Recession is the biggest risk for stocks over the next year, according to 42% of respondents, followed by interest rates at 23%.

While inflation has slowed, it’s still elevated and credit conditions are tighter. However, the labor market remains relatively robust and consumers continue to spend.

“This is not a normal environment,” said BI’s Adams. “Anticipation of recession is a really unique scenario that’s framing investors’ thought process and limiting visibility.”

Retail investors were more likely than Wall Street to choose equities as the asset best positioned over the next year.

Both groups were roughly split down the middle on whether Treasury yields will be higher or lower a month from now, highlighting the lack of clarity.

“The market does tend to move in the direction of the greatest pain,” Adams said. “So if everyone is positioning neutrally, and the market breaks out or breaks down, investors will chase the direction of the market, exacerbating the move.”