September 30, 2023

Big Tech Rally will only grow as recession worries take hold, investors say

(Bloomberg) — This year’s Big Tech rally must continue as the risk of a US recession is driving investors toward stocks that offer profitable growth in lean times, according to the latest Markets Live Pulse survey.

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About 41% of the 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 like Apple Inc. and Microsoft Corp., which have surged as markets embrace growth and shy away from economically sensitive sectors.

Investors are entering a new month with little clarity on interest rates and the economy. That increases 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 recovered more than half of the losses it saw from a peak in late 2021 to a trough in 2022, gaining momentum with the buzz around artificial intelligence.

“No one wants to stick their neck out,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “We’re seeing extraordinary interest in U.S. large-cap technology, which has long been a major driver of investment.”

Quality easily beat momentum, value and low risk/volatility/beta in the MLIV Pulse survey as the winning strategy for buying stocks that score high on one factor while selling the opposite.

Some strategists are also becoming more optimistic: Citigroup Inc. last week raised tech to overweight and US equities to neutral, ahead of a boost from AI and an end to Federal Reserve rate hikes.

The rush to technology makes trading more expensive. It is the most expensive of the S&P 500 sectors, with Bloomberg Intelligence noting that valuation multiples are nearing their highest levels since the first quarter of 2022.

While survey respondents believe technology is going to do better, “it’s not like it’s a free lunch,” said BI US Quantitative Equity Strategist Christopher Cain. “Often that is already priced in.”

Still, robust corporate commentary supports the optimism so far. Nvidia Corp. hit an all-time high after outlook beat expectations for demand for AI processors. And mutual funds have remained largely on the sidelines of the rally, suggesting further buying potential.

In the broader market, where the S&P 500 is locked in one of the tightest trade bands in years, a majority of respondents expect modest moves or no gains from now on.

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

Recession is the biggest risk for equities in the coming year, according to 42% of respondents, followed by interest rates at 23%.

Although inflation has slowed, it is still high and credit conditions are tighter. However, the labor market remains relatively robust and consumers continue to spend.

“This is not a normal environment,” says BI’s Adams. “Recession anticipation is a truly unique scenario that shapes investor thinking and limits visibility.”

Private investors were more likely than Wall Street to choose stocks as the best-positioned asset for the year ahead. Both groups were roughly divided on whether government bond yields will be higher or lower in a month’s time, highlighting the lack of clarity.

“The market tends to move in the direction of the greatest pain,” Adams said. “So if everyone positions neutral and the market breaks or breaks, investors will follow the direction of the market, exacerbating the move.”

MLIV Pulse is a weekly poll of Bloomberg News readers on the terminal and online conducted by Bloomberg’s Markets Live team, which also runs a 24/7 MLIV blog on the terminal.

This week’s survey focuses on working from home and returning to the office. Would you change jobs if your employer required more time at the office? Click here to share your opinion.

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