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Tech Shows Initial Signs of Revival: Trend Likely to Continue

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Wall Street witnessed a broad-based decline in 2022 with the technology sector suffering the most. The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered owing to overvaluation, a high interest rate regime and tighter monetary control adopted by the Fed to combat a 40-year high inflation.

However, as we have entered 2023, a very early sign of a rebound in the technology sector is clearly visible. Of the three major stock indexes — month to date — the tech-heavy has gained 6.4% while the Dow and the S&P 500 have risen 0.7%, respectively. Year to date, of the 11 broad sectors of the S&P 500 Index, the Technology Select Sector SPDR (XLK) and the tech-laden Communication Services Select Sector SPDR (XLC) have rallied 5.5% and 10.7%, respectively. This trend is likely to get further momentum in 2023.

Peak Inflation Seems Behind Us

Peak inflation seems behind us. Less-than-expected inflation rates in October, November and December with respect to several measures have clearly indicated this. The University of Michigan Surveys of Consumers released on Jan 13 showed that the one-year inflation outlook slipped to a preliminary reading of 4.0% this month from 4.4% in December, the lowest reading since April 2021.

The Fed raised  the benchmark interest rate 4.25% in 2022 to the range of 4.25 to 4.5%. Market is currently expecting the central  bank to increase the interest rate maximum by 75 basis points in 2023. Some financial analysts are expecting the first rate cut to come in the last quarter of 2023 or in early 2024.
On the other hand, the U.S. labor market remains resilient. The initial results of the fourth-quarter 2022 earnings were as disappointing as expected. Therefore, the Fed may reach its goal of a soft landing.

Technology is the Best Bet for the Long Term

Last year’s meltdown of the technology sector was a temporary phenomenon. The fundamentals of this sector are rock solid. We must not forget that the growing demand for hi-tech products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, Artificial Intelligence, self-driving vehicles, digital personal assistants and Internet of Things, has given a boost to the overall space.

The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data serve most of their needs. Even those using smartphones, rarely utilize online digital features.   

However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons for other countries. Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of online platforms.

Tech is No Longer Overvalued

The technology sector suffered a massive humiliation in 2022. The Nasdaq Composite plummeted 33.1% year over year and 32.9% from its all-time high. On the other hand, the XLK and XLC are currently trading at a 20% and 30.7% discount, respectively, from their 52-week highs.

Technology behemoths like Apple Inc. (AAPL - Free Report) , Microsoft Corp. (MSFT - Free Report) , Meta Platforms Inc. (META - Free Report) , Alphabet Inc. (GOOGL - Free Report) and NVIDIA Corp. (NVDA - Free Report) are currently trading at 23.2%, 24%, 57.5%, 35.3% and 38.4% discount from their respective 52-week high levels. These five stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

These companies have a solid business model, globally claimed brand value and strong financial positions. A weak guidance for one or two quarters will not affect the share prices of these companies to a great extent.

On the other hand, these stocks were heavily shorted and have corrected significantly in the past year. A gradually declining inflation rate, a lower magnitude of interest rate hike and the possibility of a soft landing (without recession) of the U.S. economy  will result in a sharp northbound movement of these stock prices.

The chart below shows the price performance of the five above-mentioned stocks in the past year.

Zacks Investment Research
Image Source: Zacks Investment Research

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