Tech stocks: what Wall Street experts advise in a bear market

Tech stocks have recovered some of their mojo, at least for now. Some of the downed tech-related names rebounded from the most recent market low on June 16.

In our series What to do in a bear market, Yahoo Finance examines recommendations from Wall Street analysts on technology-related holdings amid a slowing economy and moves by the Federal Reserve to reduce inflation.

On Wednesday, the central bank announced a rate hike of 75 basis points. Fed Chairman Jerome Powell said interest rates have reached a neutral level and that the Fed would be “data dependent” in the future, essentially throwing forward guidance out the window. Risk activities increased during Powell’s unscripted observations.

“This week’s risk rally suggests investors are betting the Fed’s future moves will be more modest,” Yahoo Finance’s Jared Blikre recently noted.

Despite a recent rebound, communications services and technology stocks are two of the most lagging sectors in the S&P 500 year to date (behind consumer discretionary).

So what should investors do if they hold tech-related stocks? We asked the experts.

“The big, big bet on technology is basically that real rates and longer-term real rates in the US will stay pretty favorable and pretty low,” Max Kettner, chief multi-asset strategist at HSBC, told Yahoo Finance Live recently. .

“This is also our base case. So that actually means that the environment we have at the moment is quite conducive to growth away from value, away from that kind of shorter duration, [for example ] financials – to multiple types of stock growth, “he added.

“At the end of the day, it’s really about the valuation there, and the valuation there is mostly really a function of what’s happening with the longer-term real rates and, as we know, it’s a function of Fed policy,” he said. continued.

“If the Fed can’t really raise rates that much, then technology seems like a pretty decent place to hide, along with the larger universe of growth,” Kettner added.

Which technology stocks can be held in a portfolio?

David Trainer, CEO of New Constructs, said: “Investors should be selective in their choice of stocks in the technology sector. The strongest types of stocks are those where cash flows are strong and valuations underestimate the company’s ability to generate cash flows in the future. ”

He said his companies’ preferred technology stocks include Microsoft (MSFT), Alphabet (GOOGL), Cisco (CSCO), and Oracle (ORCL). “Our advice to investors when it comes to technology stocks is to know what you are buying and fully understand the company’s ability to generate cash flow,” she added.

“It’s important that investors do their homework – diligence matters. Betting on stocks to continue to rise just because they have risen in the past is no longer a reliable strategy, ”said Trainer.

What about social media platforms like Meta (HALF), which is down 52% from the start of the year?

Brent Thill, an equity research analyst at Jefferies, joined Yahoo Finance Live following Meta’s quarterly earnings. “Stocks are cheap. Negativity is insane,” he said.

“There’s really no catalyst for ad names,” Thill said. “As long as the larger macro environment is difficult, these names won’t work in the short term.”

He added that long-term patient investors at this multiple will benefit. “In the short term, I think the technology is in a really tough spot for the next six months until we get clarity on what the ’23 numbers look like,” she said.

Social media platform CEO Mark Zuckerberg recently warned that “the economic downturn will have a large impact on the digital advertising business.” Meta, formally known as Facebook, had already faced challenges due to iPhone maker Apple’s (AAPL) IOS privacy changes, making it harder for the company to target ads.

“It’s a lot harder for ad-based names,” Thill said. “I think in the meantime dollars will continue to go up on Google on big platforms, companies that have great cash flow.”

Do some tech stocks perform better than others during slowdowns?

For John Freeman, vice president of equity research at CFRA, the answer is clear. “If you have at least a four-year horizon … the software just screams YES. It’s the place to be, “he told Yahoo Finance.

“Software is eating the world,” he added. “If we have a stressful economy in a recession, you will have good software and you will have poor software. And good software is obviously cloud-based software, or those companies that are now a kind of cloud over 50%.” the analyst added.

“In an economic situation, you become more digital, you rely on it. This is what we have seen happen before. And I don’t understand why it will be different this time, ”Freeman said.

“Here’s the other thing about all of these cloud businesses, they’re inherently very profitable,” he said.

It also prefers software to hardware, or even electric vehicle giant Tesla (TSLA), which some investors see as a tech company.

“[Tesla] it has a lot of software in there … but it sells cars. There is a gross margin in this. There is a bill of materials, “he added.” I think Tesla is a great company. I’m not making a stock call but … software companies are doing a lot better right now. “

Is it wise to hold on to unprofitable tech companies during Fed tightening cycles?

Many unprofitable tech companies did really well in 2020 and 2021, only to see their pandemic gains evaporate.

“Fed tightening cycles are not conducive to speculative technology names,” Hue Roberts, head of analysis at Quant Insight, told Yahoo Finance. “Qi has been bearish on unprofitable technology throughout 2022.”

Roberts highlighted Cathie Wood’s ARK Innovation ETF (ARKK). Some of the holdings in the exchange-traded fund include unprofitable tech companies that outperformed during the pandemic.

“The graph below shows ARKK as a benchmark for the industry. The red line shows the value of the Qi model with macro guarantee. It has had a downward trend all year round. Macro conditions have deteriorated, ”Roberts said.

Chart highlighting ARK Innovation ETF, compiled by Quant Isight

Chart highlighting ARK Innovation ETF, compiled by Quant Isight

“This week the market interpreted the Fed as a turn in an accommodative direction. To the extent that this helped ease financial conditions (lower real yields, tighter credit spreads), it helped ARKK rebound. But we would like to see the red line make new highs to break the downtrend to signal the green light, “said Roberts.

Ines is a stock market journalist. Follow her on Twitter at @ines_ferre

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