After dropping more than 33% last year amid aggressive interest rate hikes and stubborn inflation, the tech-heavy Nasdaq composite has recovered roughly 12% in 2023. Better than expected labor market data, the rise of Artificial Intelligence (A.I.), and optimism about a potentially dovish Federal Reserve have helped boost the beaten-down sector. But Gene Munster, a veteran tech analyst and managing partner at Deepwater Asset Management, warned Monday that Fed Chairman Jerome Powell could pop tech investors’ bubble this week.
“I suspect that he’s going to be pretty hawkish. And I suspect that that’s going to lay the groundwork for a sell-off in tech,” he told CNBC.
Fed Chair Powell will appear before the Senate Banking Committee on Tuesday and Wednesday in his first public outing since a Feb. 7 interview with the private equity billionaire David Rubenstein that was largely interpreted as dovish by markets. He’s expected to discuss February’s Federal Open Market Committee meeting minutes, where most Fed officials said they anticipated “ongoing” rate hikes and some even argued that recent labor market strength warrants a “tighter stance of monetary policy.”
Munster argued that Powell realized after his comments last month that if he is not “overly hawkish”—repeatedly doubling down on his inflation-fighting stance—every time he speaks, then markets interpret it as a sign that he will pause interest rate hikes or even pivot to cuts.
As a result, the tech analyst said that he expects to see Powell “retreat to his fallback position of a more hawkish tone” during the hearing. And a hawkish Fed is never good for tech stocks, which rely on low rates to invest in their growth and are often valued using the Fed’s benchmark interest rate.
“I’m a big believer in tech, but I think the first half of the year is going to be a difficult era,” Munster warned, pointing to the potential for a hawkish Powell to spoil the party.
A second-half run?
When even the most bullish of tech analysts says they are sitting on cash rather than investing, it may make sense to pay attention to their concerns. And Munster—who has spent decades covering the space as a noted bull—is doing just that. He revealed Monday that one of his funds is holding over 50% cash in preparation for a tech stock rout in the first half of this year.
For investors seeking to “time the market”—something financial advisers often advise against doing—Munster said it makes sense to hold a sizable cash position in order to avoid near-term pain, while positioning to take advantage of long-term trends.
“I think the back half of 2023 and into 2024 is going to be a great era,” he said. “Near term, [we’re] more cautious, but I still think…there are great companies to be invested in.”
Munster isn’t the only analyst on Wall Street to highlight the near-term vulnerability of tech stocks. Morgan Stanley’s U.S. Equity team released its 2023 Tech Sector Playbook on Monday, and made the case that the “final lows” for the sector are still ahead.
“We recommend waiting for a durable trough in the broader market before adding risk more aggressively to the sector,” they wrote.
Morgan Stanley believes that tech sector earnings will continue to “deteriorate” in the first half of this year as stubborn inflation and rising interest rates weigh on margins. But after that, they expect a “strong second half” due to a global economic recovery, the rise of AI, and less aggressive central banks.
The team recommended that investors prepare tech stock “buy lists” during the first half of the year, to take advantage when the time is right.
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