Tech stock surge especially pronounced in riskiest corners of market, suggesting to some the potential for swift reversal
Author of the article:
Bloomberg News
Ryan Vlastelica
Published Feb 08, 2023 • 3 minute read
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A view of the exterior of the Nasdaq market site in Times Square in New York City. Photo by Shannon Stapleton/Reuters files This year’s surge in technology stocks has been especially pronounced in the riskiest corners of the market, suggesting to some skeptics the potential for a swift reversal.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Unprofitable software developers, cryptocurrency firms, meme stocks, electric-vehicle makers and anything even tangentially related to artificial intelligence have all been on fire as the Nasdaq 100 Index has jumped 16 per cent. The bull case is that financial conditions are much more welcoming now than they were in late 2022, with bond yields dropping from their recent highs as concern eases about inflation.
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A Goldman Sachs Group Inc. basket of unprofitable tech stocks is up 27 per cent. EV maker Lucid Group Inc. is leading among Nasdaq 100 components with a surge of 69 per cent. Among AI stocks, C3.ai Inc. and SoundHound AI Inc. have both more than doubled, while BuzzFeed Inc. has climbed 161 per cent on a plan to use AI in content creation.
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In a measure of how investors have been gravitating toward risk, an analysis by Bank of America Corp. showed that the most shorted tenth of stocks in the S&P 500 has outperformed the least shorted by about 14 percentage points in 2023, while companies whose earnings missed estimates outperformed the S&P in the five days following the results, a trend the broker deemed perverse.
Jim Smigiel, chief investment officer at SEI Investments Co., dubbed the action a “junk rally,” where the lowest-quality stocks do the best.
“It really feels like we’re back in the meme times, but the difference in the macro backdrop couldn’t be any starker,” he said. “This is massive speculation, and it is going to burn itself out quickly because there are no fundamental drivers behind it.”
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This view is backed up by market positioning, as bearish bets on the Nasdaq 100 are building, according to Citigroup Inc.
This is massive speculation, and it is going to burn itself out quickly
Jim Smigiel, chief investment officer, SEI Investments Co
This year’s swings recall the retail-and-Reddit frenzy of the pandemic era, which spurred massive gains in troubled companies such as AMC Entertainment Holdings Inc. — another of this year’s climbers, up 52 per cent. However, that occurred at a time when the market was awash with stimulus and interest rates were at rock-bottom levels, bolstering valuations.
The backdrop is much different now. Monetary conditions are much tighter, even if market interest rates have pulled back from their peaks, and economists are fretting about a potential recession ahead.
Last week, the United States Federal Reserve lifted rates by a smaller degree than previous hikes, though chair Jerome Powell said the central bank expects to deliver a few more increases before pausing its campaign to fight inflation. Some investors are betting the Fed will cut rates later this year, but if that proves to be premature, as last week’s red-hot payroll report suggested it could be, tech’s 2023 rally could be vulnerable.
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Recommended from Editorial FOMO fuels market rally as investors assess risks of a recession are receding Big Tech is back, but be careful about going all in on rate-sensitive sectors Cathie Wood says ARKK is ‘the New Nasdaq’ How investors can ride the EV boom without betting on Elon Musk “We are in a narrow window where fears about inflation are subsiding, but we haven’t yet given our attention to slowing growth,” said Irene Tunkel, chief strategist of U.S. equity strategy at BCA Research Inc. “Unprofitable and other risky companies are the prime candidates to rebound in this window, but this speculative exuberance is not a sustainable rebound.”
At the same time, the fundamental picture has been soft. A number of bellwether stocks, including Microsoft Corp., Apple Inc., Amazon.com Inc. and Alphabet Inc., all reported results that were seen as mixed or weak. With more than half the components having reported, only about half the companies in the S&P 500 tech sector have beaten expectations in terms of revenue, down from 59 per cent last quarter, according to data compiled by Bloomberg.
“We’ve had a lot of disappointments on the top line, and we’re headed for an earnings recession that is only starting to play out,” Tunkel said. “Too many things have to go right for the rally to continue at this pace, and that’s offset by the probability that the gains will reverse and you’ll lose your capital.”
—With assistance from Subrat Patnaik
Bloomberg.com