Weekly Buzz: Tech stocks are back but for how Long?

⏱️ 2023’s tech stock rally might be here for a good time, not a long time

Over the last few weeks, we’ve talked a lot about market turmoil but there have been some bright spots. 

After a challenging 2022, technology stocks have seen a strong start to 2023. In the first quarter, we saw strong gains from large-cap technology companies such as Amazon, Microsoft, Apple and Alphabet. Meta’s performance was especially notable: Facebook’s parent company’s fourth-quarter revenues exceeded the market’s expectations, despite recent concerns about the firm’s trajectory and flagging ad growth. 

🐎 What’s driving the rally?

Tech stocks tend to be volatile assets because of their vulnerability to fluctuations in interest and inflation rates. However, as trouble roiled the banking sector, investors flocked to Big Tech in search of a safe haven – which may or may not have been the right move, but more on that in a sec.

Another factor that could be contributing to investors’ flight to tech is the surging enthusiasm around generative AI in the wake of ChatGPT-4’s release, and Microsoft’s announced US$13 billion bet on OpenAI. Some analysts predict that AI could boost the global economy by 7% over the next decade, while also providing a lift to the semiconductor sector which provides key chips for running AI tools. 

🤔 Can tech’s boom times last?

While tech’s comeback has bolstered investors’ spirits, there’s no telling how sustainable the rally will be. Historically, when gains are concentrated in a narrow group of companies, they don’t tend to last. Furthermore, if the Fed continues on its rate-hike campaign or decides to keep interest rates high, tech stocks could face further downward pressure. 

We might even be witnessing a bear market rally, à la the dot-com bubble – after the bust, stock prices bounced up and down in big swings. (More on bear market rallies in our Jargon Buster). 

Given how uncertain tech’s future is, taking a narrow investment approach in the hopes that things will improve could leave investors vulnerable to sudden changes in the market. Instead of trying to game the market, investing in a well-diversified portfolio of bonds and equities aligned with your risk appetite can help you ride out volatility and reach your financial goals. 

📈 Speaking of inflation… 

On Wednesday, we got new data on US  consumer price index (CPI) inflation. As analysts had predicted, inflation has indeed cooled. 

To be specific, in March, headline CPI inflation rose by just 0.1% from the previous month compared to 0.4% in February. That translates into a 5.0% gain from the previous year, down from 6.0%. But don’t break out the champagne just yet. Core inflation, which is a better gauge of underlying price pressures, edged down only slightly to a 0.4% month-on-month gain, with the year-on-year reading edging up to 5.6%.

Combined with the ongoing strength of the labour market and OPEC’s production cuts (see our last Weekly Buzz for more on that), this latest crop of data tells us that the disinflation process is still a work in progress – which means another Fed interest rate hike is likely in the cards for May.

🌎 What else we’re keeping an eye out on:

📒 Welcome to 2023’s first earnings season 

As Q2 2023 kicks off, the market is set to welcome the first batch of earnings data from Q1 – and the general consensus is gloomy, with analysts predicting an average 7% drop in companies’ earnings per share, compared to a year ago. While the news is likely to impact investor confidence, they may help give us a better idea of how the economy is faring. 

🎓 Jargon buster: Bear market rally 

Bear market rallies are sharp rebounds in share prices that occur during a wider bear market in response to brief periods of investor optimism. These surges in share prices tend to be short-lived and usually come in the form of 10-20% increase in prices. Bear market rallies have occurred at various points in history, notably after the stock market crash of 1929 and the 2000 dot-com crash.