It’s time to take profits on tech stocks — the early sector winner of 2023 — as the Federal Reserve may soon dash hopes for a pivot on interest rates, says Gargi Chaudhuri, BlackRock’s Head of iShares Investment Strategy Americas.
“[We] caution against chasing the rebound in equity prices, particularly in growth-style equities and sectors like technology,” Chaudhuri wrote in a note to clients on Monday.
The strategist noted that “investors should be positioning for the Fed to pause and not to pivot. Regardless of what the Fed’s actual terminal rate is, we see the Fed staying on hold for a prolonged period as it assesses the impact of its policy.”
The potential for lower interest rates at some point later this year has fueled a strong rebound in tech stocks out of the gate in 2023.
Year to date, the tech-heavy Nasdaq Composite (^IXIC) has advanced an eye-popping 13.7%, outperforming the S&P 500’s (^GSPC) 7.7% gain.
And household name tech stocks have enjoyed even heartier gains: Meta (META) has skyrocketed 49% in 2023, Netflix (NFLX) is up 20%, and Apple (AAPL) has increased 18%.
The strong increases in tech companies’ market caps have come despite mixed fourth-quarter earnings and outlooks this month, not to mention a steady drumbeat of layoff news by the likes of PayPal (PYPL), Microsoft (MSFT), and Amazon (AMZN).
Chaudhuri was particularly concerned about the pace of corporate earnings and how they don’t appear to square with the rise in tech valuations.
That concern isn’t misplaced: Fourth-quarter earnings for S&P 500 tech companies dropped 10.4% year over year, according to Bank of America, and sales for tech have been tracking down 1.7% from a year ago.
On top of that, 2023 earnings estimates for tech have fallen by 17% from June 2022 through early February, the BofA data showed.
Federal Reserve Chair Jerome Powell looks at his phone during a meeting at the International Monetary Fund World Bank Group Annual Meetings in Washington, DC, on October 14, 2022. (Photo by JIM WATSON/AFP via Getty Images)
Moreover, various Fed members have been out in the force over the past week tamping down on the possibility of a pivot on rate policy.
Overall, pros such as Chaudhuri believe the conditions are in place for a pullback in high-growth areas of the market like tech.
“The rally has been fueled in no small part by the decline in rates, with the correlation between S&P 500 total returns and 10-year Treasury yields at its most negative in 20 years,” Chaudhuri wrote. “The tech sector, with its high growth rates, is particularly sensitive to rates and so we expect these recent gains to be transitory.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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