The time has come to take profits on tech stocks — early 2023 sector winners — as the Federal Reserve may soon dash hopes of a change in interest rates, says Gargi Chowdhary, head of BlackRock’s iShares Investment Strategy Americas.
,[We] “Caution should be taken against chasing a rebound in equity prices, especially in sectors such as growth-style equities and technology,” Chowdhury wrote in a note to clients on Monday.
The strategist added that “Investors should position the Fed to hold and not pivot. Regardless of the Fed’s actual terminal rate, we see the Fed hold longer as it assesses the effectiveness of its policy.” does.”
The prospect of lower interest rates at some point later this year has fueled a strong comeback in tech stocks out of the gate in 2023.
Year to date, the tech-heavy Nasdaq Composite (^IXIC) has gained an impressive 13.7%, outperforming the S&P 500’s (^GSPC) gain of 7.7%.
And household name tech stocks have posted even greater gains: META (META) has skyrocketed 49% in 2023, Netflix (NFLX) is up 20%, and Apple (AAPL) is up 18%.
Strong growth in tech companies’ market caps came this month despite mixed fourth-quarter earnings and outlooks, not to mention a steady drumbeat of layoff news from the likes of PayPal (PYPL), Microsoft (MSFT), and Amazon (AMZN) Is. ,
Chowdhury was particularly concerned about the pace of corporate earnings and how they didn’t appear to be keeping up with the rise in technical valuations.
The concern isn’t misplaced: According to Bank of America, fourth-quarter earnings of S&P 500 tech companies declined 10.4% year over year, and tech sales are down 1.7% from a year earlier.
On top of that, 2023 earnings estimates for the tech have fallen 17% from June 2022 through early February, BofA data showed.
Federal Reserve Chairman Jerome Powell looks at his phone during a meeting at the International Monetary Fund World Bank Group annual meeting on October 14, 2022 in Washington, DC. (Photo by JIM WATSON/AFP via Getty Images)
In addition, various Fed members have been out in force over the past week to reduce the likelihood of a pivot on rate policy.
Overall, pros like Chowdhary believe conditions are in place for a pullback in high-growth areas of the market such as tech.
“With the correlation between the S&P 500’s total return and the 10-year Treasury yield turning most negative in 20 years, the rally has been fueled in no small part by the fall in rates,” Chowdhury wrote. “The tech sector, with its high growth rates, is particularly sensitive to rates and so we expect these recent gains to be fleeting.”
Brian Sozzi a great editor anchor at yahoo finance, Follow Sozy on Twitter @BrianSozzi and on LinkedIn,
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