Dear clients,
A prolonged period of economic downturn in the U.S. will cause tech stocks to plummet at a time when they are attracting a lot of investor money, strategists at Bank of America Corp. say.
Michael Hartnett’s team expects the recession to „crack credit and tech“ just as it did in 2008, according to Friday’s note.
Investors poured $3.8 billion into technology stocks in the week ended May 10, the largest inflow since December 2021, BofA reported, citing data from EPFR Global. On the other hand, $2.1 billion was pulled out of financial stocks, the biggest buyout since May 2022, amid turmoil at regional U.S. banks.
The tech-heavy Nasdaq 100 index is up 22% this year as investors expect the Federal Reserve to begin easing monetary policy soon, easing pressure on the rate-sensitive sector. And while earnings in this sector will continue to fall from last year, traders already expect a recovery in 2024.
Hartnett, who correctly predicted last year that recession fears would cause stocks to pull back, warned that the U.S. central bank was unlikely to pause rate hikes amid high inflation, as well as low unemployment and presidential approval. That echoes the views of Bloomberg Intelligence strategists, who view the likelihood of weakening tech, media and telecom stocks as they „face the reality of longer-term interest rate hikes and a softening of the earnings outlook.“
Hartnett thinks negative wage data will be a buying signal for cyclical economic-related stocks, such as tech stocks, in 2023. The U.S. labor market has proven resilient, with hiring and worker wage growth accelerating in April.
Other notable flows over the past week included a slowdown in cash inflows – $13.8 billion went into that asset class. At the same time, Treasuries saw the largest inflows in the past six weeks, with $6.3 billion. U.S. and European equity funds bought $2.7 billion and $2.2 billion each, respectively.
