Mega-cap tech stocks have powered the US stock market’s 2023 rally, but that may not last for long.
Analysts at top banks including Morgan Stanley, JPMorgan and BofA warn the sector faces a selloff as a recession looms.
Here is a selection of the most recent Wall Street commentary on tech stocks.
Morgan Stanley: Buy these 19 stocks to profit from an investing strategy that produces positive returns 100% of the time
Morgan Stanley sees downside for stocks and weakness for the economy on the horizon.
When a rebound rally comes, history says that technology stocks will outperform.
Here are 19 stocks to buy after the stock market bottoms, according to the firm.
The next several months are shaping up to be difficult for both stocks and the economy, according to Morgan Stanley’s top strategists.
Rising interest rates are expected to weigh on corporate earnings and hurt economic growth, the firm warned recently. That’s a dangerous combination that Morgan Stanley believes will unwind the S&P 500’s recent gains and send the index to new lows for this market cycle.
Evidence of that weakness is already here. Earnings fell 3% year-over-year in the latest quarter, according to data from Oppenheimer, even though revenue rose roughly 5.6%.
Even more troubling is that Morgan Stanley’s US cycle indicator, which compiles several key macroeconomic data points, is flashing red for the first time since right before the pandemic.
Other economic indicators, including the Conference Board’s Leading Economic Indicator, are historically weak, according to Morgan Stanley, suggesting that a recession could be coming.
However, all is not lost for investors in 2023. Morgan Stanley thinks that after US stocks trough, they’ll roar back to life in a new bull market that will be led by stocks in the technology sector.
“We see a 1H ’23 bear market low followed by a strong second half as equities broadly and the Tech sector look forward to better growth in ’24 and more accommodative monetary policy,” wrote Andrew Pauker, a strategist at Morgan Stanley, in a March 6 note.
19 tech stocks to buy when markets start to rebound
Besides an improved global growth outlook and lower interest rates, Pauker noted that the next sustained rally for US stocks will be driven by better consumer balance sheets, pent-up demand in capital expenditure, positive operating leverage, and even artificial intelligence.
“While we remain focused on the path to new lows in the first half of this year, we also highlight several potential cyclical and secular drivers of the next bull market in equities and encourage investors to start preparing their Tech buy list ahead of the trough,” Pauker wrote.
Morgan Stanley zeroed in on tech stocks because they’ve historically underperformed before the broader market bottoms but tend to significantly outperform afterward. In fact, the firm noted that tech has a 100% positive return rate in the one, three, six, and 12 months following market lows.
Within the tech sector, the best relative post-low returns typically come from companies in the internet retail, interactive media & services, semiconductors, and tech hardware industries, Pauker noted. He added that early in expansions, economically sensitive firms have topped their defensive counterparts by 28% on average.
Below are 19 tech stocks that Morgan Stanley expects to perform well after the market bottoms. Along with each is its ticker, market capitalization, industry, and thesis from the analyst that covers it. These names are separate from its list of tech stocks to buy during market weakness.
Note that the majority of stocks on this list have a bullish overweight rating, though eight have an equal-weight rating while one name — Logitech — has an underweight rating from the firm.
Industry: Equity Real Estate Investment Trusts (REITs)
Thesis: “Outfront’s exposure to advertising revenue via billboard and transit displays stands to benefit as the cycle rebounds and growth in advertising dollars accelerates. Leverage and ~50% incremental margins should drive the stock higher in a cyclical rebound.”
Thesis: “Disney’s Parks and advertising businesses should benefit from a healthy consumer environment, with a new approach to managing and optimizing its Media business supporting improving returns.”
Thesis: “Our EW thesis on WBD shares is based on an attractive de-leveraging opportunity ahead balanced against: 1) the current weak state and direction of the global advertising market, revenues that carry high incremental margins at WBD; and 2) execution risk around the roll-out of its new streaming ‘enhanced service’ coming first to the US this spring.”
Thesis: “Historically a HSD/LDD grower, but going through a revenue/profitability mean reversion after significant COVID pull-forward. Should benefit from a cyclical recovery in hardware demand as economic conditions improve.”
Thesis: “The most cyclical company in hardware coverage, and the #1 outperformer when emerging from the market bottom with a 100% hit rate in the last 2 downcycles.”
Thesis: “A GARP consumer hardware company that has faced a very challenging last 6 months, but is taking the steps to get back to their 10% rev/20% EBITDA growth cadence. Higher beta name that should outperform in a cyclical rebound.”
Thesis: “Tenable remains a leading share gainer in the Vulnerability Management (VM) space, with increased multiproduct adoption via the Tenable One bundle aiding expansion outside of core VM competencies. We think Tenable’s expansion from core VM to a broader Cyber Exposure Platform remains underappreciated, as faster growing products (Tenable.io, Cloud Security, AD, OT, etc.) now represent >50% of overall sales vs 30% in 2020 and just 5% pre-IPO.”
Thesis: “EPAM is 100% exposed to secular digital transformation capabilities with high-quality delivery and an ability to appropriately balance supply and demand to support execution. We expect demand to accelerate as enterprises look to shift focus back to growth investments and away from cost optimization in an economic recovery.”
Thesis: “PayPal’s volumes are largely related to discretionary online retail spend, and we expect the stock to work once eCommerce expectations normalize, making it better suited for a post-trough cyclical recovery. Post a macroeconomic slowdown, we think PayPal can continue to take share online and grow several points above the rate of overall ecommerce, which we expect can continue to expand low-double-digits in a normalized environment.”
Thesis: “While this period will remain challenging, we see Lam’s earnings bottoming prior to semicap peers, driving a quicker rerating as fundamentals inflect.”
Thesis: “Asana’s seat-based model and exposure to the tech industry and SMB market has led to significant growth deceleration, which could re-accelerate in a cyclical rebound. The company’s negative margin profile has been rightfully penalized but should be less of a factor if growth accelerates in a more accommodative monetary policy environment.”
Thesis: “Atlassian’s product led growth model proved volatile in a weakening demand environment, but should also be quick to re-accelerate once demand improves. Additionally, an upcoming catalyst point next year in the Cloud migration should help support growth.”
Thesis: “Data analytics/data warehousing should prove to be one of the most robust secular growth trends in software, as companies build data clouds to support their AI/ML initiatives. SNOW stands well positioned to benefit from this trend. However, the consumption pricing model is inherently volatile and sees a more direct impact of changes in the demand environment — while painful on the way down, SNOW should be among the first to accelerate out of the downturn.”
Thesis: “While RNG proved out profitability potential, a tenet to our OW thesis, in last quarter’s results, we believe macro headwinds and challenges to customer budgets should remain headwinds in the near-term. We believe the degree of deceleration may challenge PT achievement in the near-term, with investors only crediting profitability/partnership story as these challenges subside.”
Thesis: “While TWLO is seeing a similar set-up to RNG in the near-term around proving out significant profitability in the model post-RIFs [reductions in force] balanced by macro headwinds to top line, we think at ~2x EV/24e Sales vs. software peers closer to ~6x, the risk/reward continues to skew positively over NTM.”
Thesis: “Modern security and infrastructure platform tied to the growth in cloud applications that should see growth stabilize as cloud optimizations come to an end.”
Thesis: “Cloud database leader in the $65B operational database market tied to the secular growth in digital applications with a usage based model that should see acceleration in CY24.”
Source: Morgan Stanley
20/20 SLIDES
Mega-cap tech stocks powered the US equity market’s impressive gains so far in 2023, but a growing chorus of analysts now warn of a selloff in the sector as an economic downturn looms.
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The tech-heavy Nasdaq Composite index is up 18% year-to-date, propelled by stellar gains in the likes of Meta Platforms and Nvidia, each of which has jumped around 98%. Chipmaker AMD rallied 50%, while electric-vehicle maker Tesla rose 35%. Apple, Amazon and Alphabet advanced around 32% each.
Investors have been drawn to tech stocks by their strong run, the buzz over artificial-intelligence since the release of ChatGPT, as well as expectations that the Federal Reserve will soon end its interest-rate increases as inflation cools.
But with the economic outlook turning gloomy and the banking turmoil fueling fears of a credit crunch, analysts including those from big Wall Street banks such as Morgan Stanley, JPMorgan, Bank of America warn that tech stocks are in for a setback.
However, not everyone agrees. There are some, like Fundstrat’s Tom Lee, who think the sector’s rally still has room to extend. Below is a selection of the latest tech-stock outlooks from Wall Street analysts.
“I don’t think the technology industry is immune from the overall economy,” he said, adding that the US is heading into a earnings downturn and is vulnerable to an economic slump.
“We now are officially going into an earnings recession. There’s is a 50-50 chance, depending on which way you look, as to whether we’re going into an actual economic recession,” he said.
Jason Hunter, JPMorgan
Mega-cap stocks have powered the equity rally of 2023, but these market leaders now face a bigger selloff risk than other names as a recession looms, according to JPMorgan strategist Jason Hunter.
“At some point, and as the growth data starts to decelerate more toward negative growth territory, that’s when you tend to see flight to quality turn into flight to cash,” Hunter told CNBC Thursday.
“And you see that rotation where we actually think these mega-cap names may temporarily – they may be more at risk than the cyclical companies because of the crowding that’s developed here.”
Michael Hartnett – who correctly called last year’s selloff – said in a research note Friday that he expects a “recession to crack credit and tech as in ’08,” referring to the economic slump that dragged down stocks after the global financial crisis.
“Our base case for FAANG this year was that it could rise as much as 50%,” Lee told CNBC earlier this month, referring to the five largest US tech companies including Facebook (now Meta Platforms), Amazon, Apple, Netflix and Google.
“You can’t really say that you’re going to have diminished demand for these products. It’s actually going to grow, and there’s not new competition,” Lee said. “So actually that their ability to make future profits is higher, and that’s why I think their PE could expand. And again, that really pulls up the whole market.”
