Investors returned to technology, after shunning the sector for the better part of 2022 amid risk-on sentiment. The Nasdaq Composite has technically been Wall Street’s best-performing index in 2023, having gained about 15.6% since the start of the year. This is very fortunate for the index, which was the worst performer in 2022 with a 30% decline. Investors are also cheering what they see as a more dovish stance by the US Federal Reserve, after the central bank announced a 25 basis point rate hike on Wednesday and admitted that inflation has been “a little easier.” An early stream of positive earnings surprises from the likes of Meta and Advanced Micro Devices have contributed to positive sentiment in the sector. Ray Wang, founder and chairman of Constellation Research, believes that these early positive results could signal the start of a sustained rally. “We have reset prices, re-earnings, job cuts and now we have profits. This could be a rebound,” Wang told CNBC’s “Street Signs Asia” on Friday. “Snap is rocking the market. The meta is back to life.” David Dietze, principal manager at Peapack Private Wealth Management, believes current valuations and potential long-term secular trends support the case for a return to technology. “One of the worst years for technology should bring out the appetite of bargain hunters. The migration to the cloud is not over yet. Meta can reduce costs in the metaverse. This large company still has good growth prospects but now trades at a more reasonable price.”, Dietze. told CNBC on Wednesday. How to play There are many ways to gain exposure to technology directly, or through various sub-sectors such as software, internet, cleantech, cloud, semiconductors and more. Goldman Sachs is particularly bullish on the software space, arguing that earnings per share of software stocks could outperform the broader S&P 500 index this year. It named ServiceNow and Workday as “well-positioned to offer investors near-term opportunities despite an evolving macro landscape.” It also named Datadog, Snowflake and Salesforce among “offensive picks that we expect to outperform peers as the broader environment approaches recovery” in a note from January 23. Deutsche Bank has several options for playing the internet segment. The top choice in e-commerce is Amazon, while they also like online dating platform Match Group. The bank in a January 30 note also highlighted Expedia, Uber, and Meta as the “best risk/reward valuations” in 2023, as well as a “strong fundamental bull case.” Meanwhile, Bernstein and Wells Fargo count Google parent Alphabet among their top picks in the internet space. Microsoft, Fortinet, Zoom In the cloud space, Microsoft remains the top pick for many on Wall Street, despite issuing a lackluster earnings forecast for the current quarter last month. About 87% of analysts covering the stock rate it a “buy,” according to FactSet data, and give it an average upside of 10.3%. “Microsoft continues to be one of the most dominant names in the world of technology, and the latest announcement to announce $10 billion in generative AI software ChatGPT marks an important step for the company’s future success” Robert Schein, chief investment officer at Blanke Schein Wealth Management , told CNBC’s “Street Signs Asia” on January 25. “With the earnings-per-share beat and the cloud segment beating consensus estimates, we continue to believe that Microsoft is a long-term buy for investors with a longer time horizon,” he said. Schein is also a fan of cybersecurity company Fortinet, a company he described as a “leader” in the segment that has had a “strong start” to the year. Christopher Crawford, managing partner at Crawford Fund Management, told CNBC’s “Street Signs Asia” on Tuesday that his technology company is overweight “for the first time in our 10-year history.” He likes pandemic-loving Zoom because of the strength of its management team and its expansion into nearby markets. Despite competition from Microsoft Teams, Crawford believes Zoom has a “strong place in the duopoly business” and will continue to grow. Beware of headwinds While the outlook for technology may be looking brighter, many believe headwinds remain. Interest rates are set to remain unchanged for longer, with Fed Chairman Jerome Powell saying he does not expect the Fed to cut rates this year. Meanwhile, disappointing earnings from tech titans Apple, Amazon and Alphabet – whose collective market capitalization stands at nearly $5 trillion – also paint a picture of consumer weakness and raise the specter of an economic slowdown. Sean O’Hara, president at Pacer ETFs, told CNBC that “tech stocks have gotten” a bit ahead, while Joe Terranova, senior director at Virtus Investment Partners told CNBC on Tuesday that he dumped Microsoft and Tesla shares in the quarterly rebalance of Virtus Terranova US Quality Momentum ETF. “The momentum is not there in the market right now, so you rely more on quality,” he said. “This is also one of the reasons why I don’t believe the high-beta nature of today’s rally, and many Nasdaq stocks are seeing this remarkable performance recovery after the decimation they face in 2022.” – CNBC’s Michael Bloom and Weizhen Tan contributed reporting