After falling more than 33% last year amid aggressive interest rate hikes and stubborn inflation, the tech-heavy Nasdaq composite has recovered an estimated 12% in 2023. Better-than-expected labor market data, rising Artificial Intelligence (AI), and optimism about the Federal Reserve’s potentially dovish stance has helped boost the battered sector. But Gene Munster, a veteran technology analyst and managing partner at Deepwater Asset Management, warned Monday that Fed Chairman Jerome Powell could create a tech investor bubble this week.
“I suspect that they will be hawkish. And I suspect that this will be a platform for selling technology,” he said. CNBC.
Fed Chairman Powell will appear before the Senate Banking Committee on Tuesday and Wednesday in his first public outing since a February 7 interview with private equity billionaire David Rubenstein that was widely interpreted as dovish by markets. They were expected to discuss the minutes of the February Federal Open Market Committee meeting, where most Fed officials said they expected rate hikes to “continue” and some said recent labor market strength warranted a “tighter monetary policy stance.”
Munster insisted that Powell realized after his comments last month that he was not “too hawkish” – repeatedly doubling down on his stance against inflation – every time he spoke, then the market interpreted it as a sign that he would pause interest rate hikes or even pivot to cut.
As a result, tech analysts said they expect to see Powell “retreat to a more hawkish tone” during the hearing. And a hawkish Fed has never been good for tech stocks, which rely on low rates to invest in growth and are often considered to use the Fed’s benchmark interest rate.
“I’m a big believer in tech, but I think the first half of the year will be a difficult period,” Munster warned, pointing to the potential for hawkish Powell to damage the party.
Second half run?
When the most bullish tech analysts say they’re sitting on cash instead of investing, it might be worth paying attention to. And Munster—which has spent decades covering the space as a noted bull—is doing just that. He announced on Monday that one of his funds has more than 50% of his money to prepare for the route of technology stocks in the first half of this year.
For investors seeking to “time the market” -something financial advisers often advise what-Munster said it makes sense to hold a sizable cash position to avoid near-term pain, while the position is to take advantage of long-term trends.
“I think the back half of 2023 and into 2024 will be a good period,” he said. “In the near term, [we’re] more cautious, but I still think … there are great companies worth investing in.
Munster isn’t the only analyst on Wall Street to highlight the near-term vulnerability of tech stocks. Morgan Stanley’s U.S. equity team released its “2023 Tech Sector Playbook” on Monday, stating that the “final bottom” for the sector is still ahead.
“We recommend waiting for a durable trough in the broader market before adding risk more aggressively to the sector,” he wrote.
Morgan Stanley believes that the earnings of the technology sector will continue to be “damaged” in the first half of this year as stubborn inflation and rising interest rates weigh on margins. But after that, he expects a “strong second half” due to global economic recovery, the rise of AI, and a less aggressive central bank.
The team recommends that investors prepare a “buy list” of tech stocks during the first half of the year, to take advantage when the time is right.
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