Investors are flocking back into tech, after shunning the sector for the better part of 2022 amid broad risk-off sentiment. The tech-heavy Nasdaq Composite has been the best-performing Wall Street index in 2023, having gained about 15.6% since the start of the year. That’s a stark turn of fortune for the index, which was the worst performer of 2022 with a 30% decline. Investors are also cheering what they see as a more dovish stance by the US Federal Reserve, after the central bank announced a 25-basis point rate hike on Wednesday and acknowledged that inflation has “eased somewhat.” An early stream of positive earnings surprises from the likes of Meta and Advanced Micro Devices has further contributed to the feel-good sentiment around the sector. Ray Wang, founder and chairman of Constellation Research, believes this early set of positive results could mark the start of a sustained rally. “We’ve had a valuation reset, earnings reset, job cuts and now a beat in earnings. This could be the rebound,” Wang told CNBC’s “Street Signs Asia” on Thursday. “Snap spooked the market. Meta has brought it back to life.” David Dietze, managing principal at Peapack Private Wealth Management, believes current valuations and the potential of longer-term secular trends support the case for a return to tech. “One of the worst years for tech has to whet the appetite of bargain hunters. The migration to cloud is not over. Meta can throttle back its expenditures on the metaverse. These large companies still have great growth prospects but now trade at more reasonable valuations ,” Dietze told CNBC on Wednesday. How to play it There’s a slew of ways to gain exposure to tech either directly, or via a diverse range of sub-sectors such as software, the internet, clean tech, cloud, semiconductors and more. Goldman Sachs is particularly bullish on the software space, arguing that earnings-per-share growth of software stocks may outpace the broader S & P 500 index this year. It named ServiceNow and Workday as “well-situated to present investors with near-term opportunity despite the evolving macro landscape.” It also named Datadog, Snowflake and Salesforce among its “set of offensive picks we expect to outperform peers when the broader environment inflects towards a recovery” in a note from Jan. 23 . Deutsche Bank has a number of picks to play the internet segment. Its top pick in e-commerce is Amazon, while it also likes the online dating platform Match Group. The bank in a note on Jan. 30 also highlighted Expedia, Uber, and Meta as having the “best valuation risk/reward” in 2023, as well as a “strong fundamental bull case.” Meanwhile, Bernstein and Wells Fargo count Google parent Alphabet among their top picks in the internet space. Microsoft, Fortinet, Zoom Within the cloud space, Microsoft remains a top pick for many on Wall Street, despite issuing a lackluster revenue forecast for the current quarter last month. Some 87% of analysts covering the stock rate it a “buy,” according to FactSet data, and give it average upside of 10.3%. “Microsoft continues to be one of the most dominant names in the technology world, and their most recent announcement of announcing $10 billion in the generative AI software ChatGPT marks a significant step toward the future success of the company” Robert Schein, chief investment officer at Blanke Schein Wealth Management, told CNBC’s “Street Signs Asia” on Jan. 25. “With an earnings-per-share beat and its cloud segment beating consensus estimates, we continue to believe Microsoft is a long-term buy for investors with a longer time horizon,” he added. Schein is also a fan of cybersecurity firm Fortinet, a company he described as a “leader” in its segment which has enjoyed a “strong start” to the year. Christopher Crawford, managing partner at Crawford Fund Management, told CNBC’s “Street Signs Asia” on Tuesday that his firm is overweight tech “for the first time in our 10-year history.” He likes pandemic darling Zoom for the strength of its management team and expansion into adjacent markets. Despite competition from Microsoft Teams, Crawford believes Zoom has a “strong place in a duopoly business” and will continue to expand. Beware of headwinds While the outlook for tech might be looking brighter, many believe headwinds remain. Interest rates are set to stay higher for longer, with Fed Chairman Jerome Powell saying he doesn’t expect the Fed to cut rates this year. Meanwhile, disappointing earnings from tech titans Apple, Amazon and Alphabet — whose collective market capitalization stands at nearly $5 trillion — also paint a picture of consumer weakness and raise the specter of an economic slowdown. Sean O’Hara, president at Pacer ETFs, told CNBC that “tech stocks have gotten “a little ahead of themselves,” while Joe Terranova, senior managing director at Virtus Investment Partners told CNBC on Tuesday that he dumped shares of Microsoft and Tesla in the quarterly rebalance of the Virtus Terranova US Quality Momentum ETF. “Momentum is not present in the market right now, so you’re relying more on quality,” he said. “It’s also one of the reasons why I don’t trust the high-beta nature of the rally currently, and a lot of the Nasdaq stocks that are seeing this remarkable performance recovery after the decimation that they received in 2022.” — CNBC’s Michael Bloom and Weizhen Tan contributed to reporting
