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After a bruising 2022, tech stocks have found themselves in an unusual position in 2023 – as havens for investors looking to avoid risk in the banking sector.
Communications services and IT stocks are tops in the S&P 500, and investors continue to buy.
There are a handful of reasons for that outperformance. Some of the bounce is payback for what some investors deemed a too-big drubbing last year. Some of it is the expectation that rates will start to move lower as the collapses of Silicon Valley Bank and Signature have led to tightening financial conditions. (The 10-year yield (^TNX) has already plunged by 0.5% since the beginning of the month amidst the banking crisis.)
The outcome is that even with giants Microsoft (MSFT) rising 15% this year and Apple (AAPL) up more than 20% – and even with both of their forward price/earnings ratios at more than 25 – buyers are willing to pay a premium in anticipation of more gains.
Tom Lee, founder and head of research at Fundstrat, is one of them. He’s remained steadfast in his faith in the FAANGs in particular: “In our 2023 Outlook, published early December, we identified FAANG and Technology as our 2023 top sector pick and argued FAANG could rise 40% or more in 2023. The banking crisis has not altered this view. But, with the realization that downside risks are significant, but not a thesis killer,” he wrote in a note to investors.
Omnipresent tech analyst Dan Ives of Wedbush is another, who in addition to Microsoft and Apple, recommends investors buy cybersecurity stocks, Salesforce, and Tesla: “While it sounds like [a] Twilight Zone comment to many investors; tech stocks have become the new safety trade with Big Tech leading the way.”
Microsoft and Apple have done so well (and groups like energy and financials have done so poorly) that the weighting of those two stocks alone has climbed to some 13% of the S&P 500 and 25% of the Nasdaq 100, an all-time high.
Not everyone is sanguine on tech, or the effect the enthusiasm for tech is having on the broader market.
“The one thing that does concern me is the concentration in everyone’s favorite stocks, so to speak,” Interactive Brokers Chief Strategist Steve Sosnick told Yahoo Finance in an interview.
He followed up in an email: “Narrowing leadership is rarely a good thing for market health… These are admittedly great companies with solid earnings and great balance sheets. But this type of outperformance and heavy index weighting means that if they stumble, they bring the whole market along with them.” (He writes at more length about the issue here).
The next expected catalysts come in late April, when Microsoft and Apple are due to report earnings.
What to watch today
Economy
- FHFA Home Price Index, January
- S&P Case-Shiller Home Price Index, January
- The Conference Board Consumer Confidence, March (101.5 expected, 102.9 previously)
- Richmond Fed Manufacturing Index, March (-8 expected, -16 previously)
- Wholesale Inventories, February; Retail Inventories, February
Earnings
- Micron Technology (MU), Walgreen Boots Alliance (WBA), Luluemon (LULU), Cal-Maine Foods (CALM), Dave & Busters (DAVE), Jefferies (JEF), McCormick (MKC)
