As the second half of 2023 unfolds, the U.S. tech sector finds itself at a crossroads, with potential trouble on the horizon, according to a recent assessment by Bank of America's Chief Investment Strategist, Michael Hartnett.
In his latest report, "The Flow Show," Hartnett points to a crucial factor that could shape the fate of tech stocks in the coming months: the waning excess liquidity on Wall Street.
The Liquidity Conundrum
Hartnett emphasizes the historic correlation between central bank liquidity and the performance of tech stocks over the past 15 years. However, recent events have defied this correlation, as global liquidity witnessed a contraction of a staggering $3 trillion, while the Nasdaq 100 is teetering towards new highs. The renowned analyst identifies this liquidity crunch as a potential headwind for the U.S. tech sector.
Hartnett highlights the remarkable journey of what he dubs the "Magnificent 7" in the tech world, consisting of Apple Inc.
This elite group of stocks has risen 93% year to date, on average, and currently represents 28% of the S&P 500 market cap.
Bank of America Holds A Bearish Stance
Nonetheless, Hartnett, renowned for his prudent insights, points to a broader concern overshadowing the AI and tech buzz - the discourse around central banks' stance on interest rates.
Bank of America's team maintains a bearish outlook on stocks for 2023, even as the market rallies. The dominance of U.S. equity and its growth in comparison to global stocks is largely influenced by the Federal Reserve's current stance. However, this dynamic may shift as we see the end of a "compliant Fed" that chooses to constrict financial conditions via increased U.S. dollar and bond yields, Hartnett said.
Bank of America projects a potential next stop for the S&P 500 Index at 4,200 points, although recognizing that the Jackson Hole Symposium could potentially alter the script.
Hartnett's message is clear: a paradigm shift is underway. In the past, a "lower-for-longer" rate environment fueled a bubble and a boom in the stock market. Now, a "higher-for-longer" rate scenario could potentially trigger a bubble pop and bust.
Hartnett's parting advice? Prepare for a strategic exit following the Fed's last rate hike.
