(Bloomberg) — Big tech’s rally should continue this year as fears of a U.S. recession drive investors into stocks, stocks that offer profitable growth in the short term, according to the latest Markets Live Pulse survey.
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Of the 492 market participants surveyed, 41 percent said the biggest gains this year will come from buying quality stocks that focus on profitability and selling those that disappoint in those conditions. That includes accepting long positions at companies like Apple Inc. and Microsoft Corp.
Investors are entering the new month with little clarity on interest rates and the economy. That’s fueling the shares’ appeal with strong cash flow and promising earnings growth, though they come with hefty price tags. The tech-heavy Nasdaq 100 has more than halved its losses from the 2021 peak to the 2022 low, and is getting more momentum from the buzz around artificial intelligence.
“No one wants to be tied down,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “We’re seeing extraordinary gains in US large-cap technology, which has long been a big driver of investment.”
In the MLIV Pulse survey, quality easily beats momentum, value and low risk/volatility/beta, a winning strategy for buying high-performing stocks for one reason while selling their opposites.
And some strategists are getting more aggressive — Citigroup Inc. Last week, technology overweighted and U.S. stocks moved to neutral, expecting a boost from AI and an end to rate hikes by the Federal Reserve.
The rush to technology makes the business more expensive. It is the most expensive among the S&P 500 sectors, with valuation multiples at their highest level since the first quarter of 2022, according to Bloomberg Intelligence.
While survey respondents believe technology can deliver better results, “it’s not like a free lunch,” said Christopher Kane, BI US Quantitative Equity Strategist. “A lot of times, that’s already paid for.”
Still, strong company sentiment is supporting the optimism so far. Nvidia Corp. set a record after its outlook for AI processors defied expectations. And mutual funds are mostly standing on the side of the rally, which suggests the possibility of further buying.
In the broader market, with the S&P 500 stuck in one of its tightest trading bands in years, most survey respondents expect modest moves or no gains.
“We expect the decline to start in the second half,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI. “And for the equity market, that means going lower first, and then maybe coming back up.”
A recession is the biggest risk to stocks next year, according to 42% of respondents, followed by interest rates at 23%.
While inflation has slowed, it is still high and credit conditions are tight. However, the labor market is relatively strong and consumers continue to spend.
“This is not a normal environment,” said BI’s Adams. “A downturn forecast is a truly exceptional situation that slows down investors’ thought processes and limits visibility.”
Retail investors were more likely than Wall Street to choose equities as a better place to invest next year. Both groups were split down the middle on whether Treasury yields were higher or lower one month later, highlighting the lack of transparency.
“The market tends to move in the direction of the biggest pain,” Adams said. “So if everyone stays neutral and the market crashes or crashes, investors will chase the direction of the market, which will make the move worse.”
MLIV Pulse is a weekly survey of Bloomberg news readers on the terminal and online, conducted by the Bloomberg Markets Live team, which runs the 24/7 MLIV blog on the terminal.
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