U.S. Tech: More Room to Run?

by
Coco Fang

The rally in U.S. equities this year has been dominated by mega-cap technology. The S&P 500 is up ~15% YTD while the Nasdaq Composite Index is up more than 30%. The bullish run resulted from a mix of factors, such as solid Q1 earnings and great AI expectations. But, how much more can technology stocks rally?Historically, in a weakening economic climate, high quality & profitable technology stocks have proved to be resilient (see figure 1), on the back of their strong balance sheets and positive cash flow. From a technical point of view, valuation has supported year-to-date outperformance of growth (see figure 2). The oversold levels since late 2021 were mainly due to Fed rate pressure to combat inflation, resulting in higher borrowing costs for businesses. Though growth is no longer oversold, it rarely gets to fair value and stays there – a swing into overbought territory is more likely than not, which means the rally may last longer. Importantly, falling yields will be a tailwind in late 2023 and 2024. As yields stabilize, the headwind on tech valuation multiples will be removed. Although margin compression in a slower economy is likely, most tech firms already adjusted the size of their workforce over the last ~6 months. Lastly, while AI right now is hopes and dreams, in the coming months and years it will start to show up in productivity improvements and thus margin expansion, creating another tailwind for technology stocks.For these reasons, we believe that U.S. tech stocks have more upside and will likely push the overall market higher. Disruptions drive market leadership over time and investing in high-quality growth stocks is critical to returns. We’ve been overweight NASDAQ since late last year and will maintain that exposure in coming months.


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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value-weighted index with each stock’s weight in the index proportionate to its market value.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.

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