Recession worries fuel Big Tech stock rally, say investors

BLOOMBERG

The Big Tech rally of this year has further to run as the risk of a US 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 focussed 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 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.
“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 US large cap tech that has been a big driver of investment for a long time.”
Some strategists are also turning more bullish — Citigroup Inc. last week raised tech to overweight and US 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 US 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 Corp surged to a record after its outlook smashed expectations on demand for AI processors. And mutual funds have largely stayed on the side-lines 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.