Following a 2022 that was punctuated by severe economic headwinds, 2023 has gotten off to an optimistic start for U.S. tech stocks. Could a full market recovery be on the cards? Or will global inflation rates continue to wreak havoc on Wall Street?
As the Fed continued to raise interest rates amid mass tech layoffs in 2022, the year was certainly tricky for the sector. As the world’s leading index for tech companies, the Nasdaq experienced a 33% drop in 2022. At the forefront of tech, FAANG stocks of many market’s favorite technology firms all saw sharp declines in share price. Such was the decline of FAANG that many experts have been calling to revise which firms should be included in this exclusive club.
But what does 2022’s declines mean for 2023? Wall Street is generally resilient in the face of short-term downturns, so could the coming months see a return to form for tech?
Taking a deeper look into the Nasdaq-100 Technology Sector Index (NDXT), we can see that 2023 so far has brought a degree of cautious optimism back to the market’s performance, with around 20% growth recorded in Q1. It’s also worth noting that the NDXT is still some 30% adrift from its November 2021 peak. With this in mind, could a full market recovery really take place in 2023? Or should caution still be prioritized as financial headwinds linger?
Reacting to the Whims of the Fed
There’s little doubt that the biggest factor for tech stocks to contend with will be the shift in expectations and outlook when it comes to the whims of the Fed in response to ongoing attempts to manage historically high inflation rates.
The tangible market upturn that we’ve seen across Wall Street in recent months coincided with the Fed’s decision to welcome drops in inflation with reductions in interest rates. Off the back of the December FOMC, which showed that inflation had continued to cool towards the end of 2022, the Fed opted to reduce the pace of rate hikes.
While this in itself could be interpreted as a credible buy signal for tech stocks, the outlook became more convoluted by the Fed lifting its peak rate projection to 5.1% from 4.8% for 2023.
With higher inflation and higher interest rates continuing to merge in 2023, the wealth of investors of all sizes and the companies they’re buying into diminishes on a significant scale. Although latest figures suggest that the economic downturn will continue to impact stocks over the course of the year, the extent of this influence is becoming increasingly disputed.
Taking a Long-Term Outlook
Though the role of the Fed in the wider tech stock market recovery can’t be underestimated, there are many analysts that have dismissed the long-term influence of rate hikes for investors.
“Despite the downturn in the market in 2022, investors are focusing on the long-term prospects and potential benefits of a favorable climate, rather than short-term fluctuations,” said Maxim Manturov, Head of Investment Advice at Freedom Finance Europe. “It is possible that rising rates could have a negative impact on the performance of tech stocks, but it is expected that certain segments of the market can still perform well despite economic challenges, and investors can hold on to their investments for years to come.”
“Quality companies that can survive and even thrive during a recession are particularly attractive, while companies with large debts may falter in difficult conditions. Although technology stocks have been hit hard in the market, the recession could open up opportunities for growth,” Manturov added.
Supporting this outlook may be investors who opt to move away from cyclical stocks during the possible upcoming period of weak economic growth in the US and beyond, and instead look to tech firms that are demonstrating a healthy level of growth.
Although not all FAANG favorites are thriving in the Q1 2023 rebound, firms like Microsoft (NASDAQ: MSFT) have experienced growth of over 14% in Q1 and can represent a solid investment opportunity for investors moving out of cyclical stocks with an eye on the future.
Small Cap Tech Firms Could Hold the Best Prospects
According to the Allianz tech outlook for 2023, seeking out opportunities to invest in tech superstars could mean that investors are missing out on better opportunities amidst small cap tech stocks in fields like healthcare and industry.
Although tech stocks remain a key part of major global indices and can be a major player in a diversified long-term portfolio, it’s worth delving deeper into the industry to uncover fresh insights at this time. For instance, China has set its focus firmly on technology and innovation as part of a commitment towards self-sufficiency, which can uncover new long-term opportunities for investors.
While it’s likely that markets will remain volatile in 2023, investors could choose to conduct their research into building positions in stocks that have greater long-term potential. Throughout a tech sector that’s ripe for innovation in the fields of AI, cybersecurity, and the metaverse, the most rewarding purchases this year may be the ones that look beyond the year ahead.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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