Powell could trigger a major tech sell-off, analysts warn
After falling more than 33% last year amid aggressive rate hikes and stubborn inflation, the tech-heavy Nasdaq Composite has rallied about 12% in 2023. Better-than-expected jobs data, the rise of artificial intelligence (AI) and optimism about a potentially dovish Federal Reserve have helped boost the ailing sector. But Gene Munster, a veteran tech analyst and managing partner at Deepwater Asset Management, warned Monday that Fed Chair Jerome Powell could burst the tech investor bubble this week.
“I suspect he’ll be quite hawkish. And I suspect that’s going to set the stage for a sell-off in tech,” he said CNBC.
Fed Chairman Powell will appear before the Senate Banking Committee Tuesday and Wednesday in his first public appearance since conducting an interview with private equity billionaire David Rubenstein on February 7 in what markets largely interpreted as dovish . He is expected to discuss February’s Federal Open Market Committee meeting minutes, in which most Fed officials said they expected “continued” rate hikes and some even argued that recent job strength warranted “tighter monetary policy.”
Munster argued that after his comments last month, Powell realized that markets would take it as a sign that he would hold off on raising rates unless he was “overly hawkish” – and reiterated his anti-inflationary stance each time he did he even speaks to pan cuts.
As a result, the tech analyst said he expects Powell to “retreat to his fallback position with a more aggressive tone” during the hearing. And a hawkish Fed is never good for tech stocks, which rely on low interest rates to invest in their growth and are often priced against the Fed’s benchmark interest rate.
“I’m a big tech advocate but I think the first half of the year is going to be a difficult era,” Munster warned, noting the potential of a combative Powell to spoil the party.
A run in the second half?
When even the most optimistic tech analysts say they’re sitting on cash rather than investing, it may make sense to heed their concerns. And that’s exactly what Munster, who has spent decades as a well-known bull, is doing. He revealed Monday that one of his funds holds over 50% cash in preparation for a tech stock route in the first half of this year.
For investors looking to “time the market” — which financial advisors often advise against — Munster said it makes sense to maintain a sizeable cash position to avoid near-term pain while positioning yourself to benefit from longer-term trends .
“I think the back half of 2023 and into 2024 will be a great era,” he said. “Short term, [we’re] more cautious, but I still think … there are great companies to invest in.”
Munster isn’t the only Wall Street analyst to point to the short-term vulnerability of tech stocks. Morgan Stanley’s US equities team released its “2023 Tech Sector Playbook” on Monday, arguing that the “final bottoms” for the sector are yet to come.
“We recommend waiting for a sustained bottom in the broader market before adding more aggressive risk to the sector,” they wrote.
Morgan Stanley believes tech 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” on the back of a global economic recovery, the rise of AI and less aggressive central banks.
The team recommended investors create “buy lists” for tech stocks in the first half of the year to take advantage when the time is right.
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