Megacap growth and tech stocks have powered robust gains on Wall Street this year, with big tech shares gaining safe-haven status for investors fearing a potential recession and volatility in the banking sector. The rally still has more room to run, according to strategists at Deutsche Bank.
See: Are tech stocks becoming a haven again? ‘It’s a mistake,’ say market analysts.
The tech-focused Nasdaq-100 index
NDX,
which tracks the top 100 nonfinancial companies listed on the Nasdaq Exchange including Apple Inc.
AAPL,
Meta Platforms Inc.
META,
Tesla Inc.
TSLA,
and NVIDIA Corp.
NVDA,
last week ended the month at its highest level since August, and advanced more than 18% for the quarter, according to Dow Jones Market Data. That compares with a 7% quarterly gain for the broader S&P 500 index
SPX,
and a merely 0.4% increase for the Dow Jones Industrial Average
DJIA,
Tech-related stocks have rebounded after a brutal 2023 that saw them bear the brunt of a broad market selloff.
“So far, the rally has largely reflected an unwinding of underweight positioning,” wrote strategists led by Binky Chadha, Deutsche Bank’s chief U.S. equity and global strategist. “We see the next leg being driven by earnings beats and rising forward estimates on which there has been very little focus so far.”
Chadha and his team said a pickup in global growth in the near-term and a peak in the U.S. dollar point to a sizable rebound in earnings growth for megacap growth and tech stocks.
“The top-down drivers of overall earnings as well as those for megacap growth and tech stocks have been upgraded significantly in recent weeks, with our economists raising their near-term forecasts for GDP growth in the U.S., Europe, China and Japan for a variety of different reasons, while the dollar has fallen significantly.”
The ICE U.S. Dollar Index
DXY,
a measure of the currency against a basket of six major rivals, has dropped 1.5% year-to-date as of Wednesday.
Deutsche Bank’s forecasts see tech earnings rebounding off the bottom of the trend channel, returning to trend levels in Q1 and then growing in line through the rest of 2023 and 2024. (See chart below)
SOURCE: BLOOMBERG FINANCE LP, DEUTSCHE BANK ASSET ALLOCATION
Tech stocks outperformed massively in the first half of 2020 in the pandemic boom when the Federal Reserve slashed interest rates and pumped trillions of dollars into economies. Stocks then went sideways for the next 18 months, before underperforming in 2022 when the central bank started its aggressive interest-rate hikes to curb the inflation.
See: What tech bust? Big Tech stocks gained $2 trillion in roaring start to 2023
Consensus estimates for tech earnings in the first quarter of 2023 have risen 1% since early February, the first upgrade in a year, and in contrast with continued downgrades to all the other major indexes, said Chadha.
Meanwhile, the upgrades also came notably after the bulk of the last earnings season was over. That’s unusual, as estimates are typically flat to down between earnings seasons, he wrote.
“In the last three earnings seasons, analysts saw next-quarter estimates fall between 1.5% and 3% at this stage. Even after the upgrades, our estimates suggest a 3.5% beat for megacap growth and tech stocks in Q1. This would be the biggest since Q4 2021 and follow four quarters of weak beats or outright misses which occurred despite estimates being cut going into reporting,” they wrote.
If the Deutsche Bank forecasts are correct, that could imply that forward estimates of next 12 months earnings, which had fallen through 2022, should inflect up and keep rolling higher for the rest of 2023, said Chadha.
U.S. stocks finished mostly lower on Wednesday as investors weighed data on private-sector employment and the services sector. The Nasdaq Composite
COMP,
slumped 1.1%, while the S&P 500 lost 0.3% and the Dow industrials gained 0.2%.
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