The big tech rally will only intensify as recession worries prevail, investors say

(Bloomberg) – This year's big tech rally is set to continue as the risk of a US recession drives investors into stocks that offer profitable growth during lean times, according to the latest Markets Live Pulse survey.

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About 41% of the 492 market participants surveyed said the highest returns this year would come from buying quality stocks with a focus on profitability and selling stocks that underperform on those factors. This includes taking long positions in companies such as Apple Inc. and Microsoft Corp., which have risen sharply as markets embrace growth and economically sensitive industries falter.

Investors start a new month with little clarity about interest rates and the economy. That makes stocks with robust cash flows and promising top-line growth more attractive, even if they come with high prices. The tech-heavy Nasdaq 100 has recouped more than half of the losses it suffered from the late 2021 peak to the 2022 bottom, and is gaining momentum on a craze for artificial intelligence.

“No one wants to stick their head out,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “We're seeing an extraordinary fascination with large-cap US technology companies, which have long been a key driver of investment.”

In the MLIV Pulse survey, quality is significantly better than momentum, value and low risk/volatility/beta as a successful strategy for buying stocks that perform well on one factor while selling their counterparts.

Some strategists have also turned more optimistic – Citigroup Inc. upgraded the technology sector to “overweight” and US equities to “neutral” last week on anticipation of a boost from AI and an end to Federal Reserve rate hikes.

The rush to technology makes trade more expensive. It's the most expensive sector in the S&P 500, with Bloomberg Intelligence noting that valuation metrics are near their highest levels since the first quarter of 2022.

While survey participants expect the technology industry to outperform, “it's not like this is a free lunch,” said Christopher Cain, quantitative equities strategist at BI US. “It's often already priced in.”

Still, solid corporate commentary supports the optimism so far. Nvidia Corp. surged to a record high after its outlook beat expectations for demand for AI processors. And mutual funds remained largely on the fringes of the rally, suggesting further buying potential.

In the broader market, with the S&P 500 stuck in one of its tightest trading ranges in years, the majority of survey participants expect modest movement or no gains from now on.

“We expect a recession to set in sometime in the second half of the year,” said Julian Emanuel, chief equities and quantitative strategist at Evercore ISI. “And for the stock market, that means going down first and then probably going up again, essentially up to here.”

According to 42% of respondents, a recession is the biggest risk for stocks over the next year, followed by interest rates at 23%.

Inflation, while slowing, is still high and credit conditions are tighter. However, the labor market remains relatively resilient and consumers continue to spend.

“This is not a normal environment,” said BI's Adams. “The anticipation of a recession is a truly unique scenario that sets investors' thought processes and limits visibility.”

Individual investors chose equities, rather than Wall Street, as the best-positioned asset for the next year. Both groups were roughly halfway split on whether government bond yields will be higher or lower a month from now, highlighting the lack of clarity.

“The market tends to move in the direction of greatest pain,” Adams said. “So if everyone goes neutral and the market breaks out or breaks down, investors will follow the direction of the market, which will add to the movement.”

MLIV Pulse is a weekly poll of Bloomberg News readers on-terminal and online, conducted by Bloomberg's Markets Live team, who also hosts a 24-hour MLIV blog on the terminal.

This week's survey focuses on working from home and returning to the office. Would you change your job if your employer asked for more office time? Click here to share your views.

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