Big technology stocks have led Wall Street gains for most of 2023 as investors sought to park their money in companies with steady earnings and strong balance sheets, immune to rising interest rates and an “impending recession.”
For instance, the Nasdaq 100 Index, dominated by Big Tech stocks like Apple, Microsoft, Amazon, Nvidia and Meta, has gained 46% year-to-date, compared to 18.68% of the S&P 500 and 3.13% of the Russell 2000 small caps index.
In recent weeks, small stocks, financials and real estate stocks have led gains on Wall Street as investors bought shares of companies that could benefit from a new investment narrative: declining interest rates and a growing economy.
For instance, in the last two weeks, the Russel 2000 and the KBW Nasdaq Bank Index rose more than 6%, twice the rise in information technology shares.
The change in investment narrative follows better-than-expected October inflation numbers, which make it more likely that the Federal Reserve will stop raising rates and eventually lower them. In addition, new data on retail sales and manufacturing show that the U.S. economy is on a soft landing rather than a recession course.
Then there’s the valuation game. Big Techs are getting expensive, with Tesla, Nvidia and Amazon trading with a PE north of 40 compared to around 20 of the S&P 500. These valuations make Big Techs vulnerable to profit-taking, as with Nvidia’s shares last week.
Still, Matt Weller, an AI market expert at FOREX.com, expects Big Techs to continue influencing the direction of financial markets for the remainder of 2023.
“Investors should stay vigilant and adapt to ever-changing dynamics,” he told the International Business Times. “Tech stocks typically outperform in good economic conditions, but face challenges during downturns, and this trend is likely to continue.”
Nonetheless, he believes that investors remain flexible, carefully assessing risk-reward profiles and considering broader economic context when allocating capital.
“The landscape may have changed dramatically in the past year, but Big Tech’s enduring size and resilience make it a compelling sector to watch, especially as conditions improve,” he added.
Joshua Warner, market analyst at FOREX.com, is cautiously upbeat on Big Tech for the rest of 2023 and 2024, seeing both challenges and opportunities in the valuation gap within the sector.
“Those with the lowest multiples that trade at a discount will become the most attractive when conditions finally improve, while some may have a tougher time justifying their valuations as the outlook becomes increasingly challenging,” he told IBT.
Brenda Christensen, CEO of Stellar Public Relations and a former corporate officer in technology for a foreign multinational publicly held company, sees a complex picture for Big Techs ahead due to growing regulatory challenges.
“On one hand, further innovation and expansion into new markets and technologies seem inevitable,” she told IBT. “Areas like AI, cloud computing and cybersecurity are ripe for growth and could drive the next wave of advancements.”
“On the other hand, these companies face increasing scrutiny from regulators and the public regarding their technologies’ data privacy, market dominance and ethical implications. This scrutiny could lead to stricter regulations, potentially impacting their business models and growth strategies, she added.”
She believes Big Tech companies may need to reinvent themselves, focusing on sustainability and ethical practices to maintain market share and public trust.
Rick Bentley, CEO of Cloudastructure, sees another challenge for the industry — outsourcing, which could eventually turn Silicon Valley into the next Detroit.
“Detroit was the nation’s economic engine for decades,” he told IBT. “By the 1950s, one in every six Americans worked directly or indirectly for the auto industry based in Detroit, and the city was the fifth largest in the U.S. Now you can get a free house there if you live in it for a year.”
That’s thanks to Detroit’s outsourcing manufacturing offshore, which turned these offshore manufacturers into formidable competitors of Detroit automakers.
“Silicon Valley has made the same mistake — dev offices in India, China and Russia,” he said. “And now we see the rise of TikTok and many companies based abroad.”
“And frankly, the collapse will happen more quickly because it’s easier to move programmers than car factories, ” Bentley added.
