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Tech Stock Rally: A Temporary Boom or an Impending Bust?

Morgan Stanley’s Michael Wilson, a leading bearish voice on US equities, cautions that the recent tech stock rally, exceeding 20%, is not sustainable. 

He believes the sector will eventually return to new lows. The Nasdaq 100 has surged into a bull market as investors have abandoned economically sensitive sectors, such as banking, following the collapse of several US lenders.

The Misconception of Tech as a Defensive Sector

Wilson attributes this rotation partly to the perception of tech as a traditional defensive sector. However, he disagrees with this notion, instead arguing that utilities, staples, and healthcare offer a better risk-reward profile. 

“Tech is actually more pro-cyclical and bottoms coincidently with the broader market in bear markets,” says Wilson, who ranked No. 1 in last year’s Institutional Investor survey after accurately predicting the stock selloff.

The strategist recommends waiting for a durable low in the broader market before aggressively adding to tech. The sector typically experiences a period of solid outperformance post-trough — when its cyclicality works in its favor on the upside.

Wilson also predicts that the expectation of the Federal Reserve ending its monetary tightening soon will disappoint investors. 

“We don’t view the recently expanded bank funding program as a form of quantitative easing that will ultimately be stimulative for risk assets,” he explains.

JPMorgan Chase & Co. Strategists: Tech “Might Not Be a Great Place to Position”

JPMorgan Chase & Co. strategists, including Mislav Matejka, also expressed skepticism about the tech sector, stating that it “might not be a great place to position in structurally anymore.” 

They believe the sector will cease strongly outperforming due to earnings risks, unattractive valuations, and very high price relatives in the long term, leaving the strategists neutral.

Matejka concurs with Wilson that defensive sectors are better-positioned than other stocks in the current climate. Although, he notes that litigation risk is largely known for healthcare, utilities are likely to benefit from less regulatory uncertainty ahead. 

In addition, cheaper valuations and an improved margin outlook in the second half may support staples.

The Potential Impact of a Tech Stock Slump on the Market

A downturn in tech stocks could significantly impact the markets, considering the sector’s role as the key driver of the S&P 500 Index’s 3.5% gain in March, despite concerns that a banking crisis could lead to a steep decline in growth. 

Microsoft Corp., Apple Inc., and Nvidia Corp. were the largest gainers last month’s benchmark, while banks remained the primary laggards.

In conclusion, the recent tech stock rally has generated concerns among experts who believe the sector’s strong performance may be short-lived. 

Investors should be cautious about jumping on the tech bandwagon, as the sector may not prove to be as defensive or sustainable as some may hope. 

Instead, defensive sectors like utilities, staples, and healthcare offer more attractive long-term prospects.