Are tech stocks becoming a haven again? ‘It’s a mistake,’ say market analysts.

Meanwhile, the Nasdaq Composite
COMP,
+1.74%,
at 12,013 at Thursday’s close, has advanced 17.4% from its bear-market low, also hit on Dec. 28. The level needed to enter a new bull market is 12,255.95, according to Dow Jones Market Data.

The S&P 500 index’s communication-services sector
SP500.50,
+2.08%
has risen 5.6%, while the information-technology sector
SP500.45,
+1.47%
has gained 6.3%, compared with a 1.4% advance for the broader benchmark stock index
SPX,
+1.44%
since March 8, when Silicon Valley Bank first announced it had to sell all available-for-sale securities to strengthen its deteriorating financial position.

Among the big tech stocks, shares of Apple Inc.
AAPL,
+1.56%
have risen 6.6% over the past three weeks, putting the stock up 24.8% so far in 2023, while Meta Platforms Inc.
META,
+1.97%
is up 72.7% over this period and Google’s parent, Alphabet Inc.
GOOG,
+2.65%

GOOGL,
+2.81%,
is up 14.3% on a year-to-date basis, according to Dow Jones Market Data.

“If we look at the very interest-rate sensitive-tech industry from a valuation perspective, what’s been happening is that a lot of those stocks went down much further than the market in general last year. You’re seeing investments going back into those now,” said Jimmy Lee, chief executive officer of the Wealth Consulting Group.

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said part of the reason was just that markets got oversold at the end of 2022, and confidence picked up as stocks kicked off 2023 on a high note with better-than-expected economic data.

“So the combination of the two caused a sharp reversal across asset classes. One of the big beneficiaries was tech stocks, and I think that is very normal.” 

See: Technology stocks like Microsoft and Apple are outperforming the S&P 500 by the widest margin in years

The tech sector emerged as a bright spot in a stock market hit by concerns about the health of the financial system in the aftermath of the collapse of two U.S. regional banks. Fears of contagion in the banking industry have pushed investors toward megacaps’ rock-solid balance sheets, strong cash-flow generation and robust profit margins. 

“Investors are feeling safer in the bellwethers of the companies that dominate their industries,” Lee told MarketWatch in a phone interview. “And a lot of the analysts are now looking at these stocks and [asking], Are they really growth stocks, or are they more value stocks?”

See: Why Wall Street’s growth-heavy Nasdaq Composite is still rallying as Treasury yields rise

A recent pullback in U.S. bond yields and hopes that the Federal Reserve is nearing the end of its monetary-policy tightening cycle are also buoying the prices of tech stocks. 

The correlation between the Nasdaq Composite
COMP,
+1.74%
and Treasury yields
TMUBMUSD02Y,
4.027%
was negative in 2022 as the Federal Reserve began raising interest rates aggressively to slow inflation and cool the economy. When bond yields rise, investors may see more value in fixed-income debt because future cash flows and growth in corporate profit will be discounted by higher interest rates, making technology stocks less appealing to investors compared with bonds and their soaring yields. 

Suzuki said the correlation between interest rates and tech stocks is not going to be a “perfect and consistent relationship,” but there is sensitivity, he said. 

“If you think about last year, you had a record rise in interest rates, and the tech sector got hurt. If you look at interest rates to start this year, until a few weeks ago, until the banking issues, you actually had interest rates going up pretty substantially. Yet tech was outperforming.”

Just two days before the collapse of the Silicon Valley Bank, Fed chief Jerome Powell took markets by surprise when he suggested the Fed may need to raise rates higher than previously anticipated. The warning, in testimony before the Senate Banking Committee on March 6, came after a series of inflation reports indicating the economy continues to run hotter than expected. 

See: Tech stocks are really expensive again. They might not be as safe as they look.

However, their strength could have drawbacks. 

The recent boost to Nasdaq valuations from declines in interest rates was certainly a welcome change, but tech stocks do need to support their prices with fundamentals, which have “deteriorated meaningfully” from last year, according to market analysts.

“It’s a mistake for people to view tech as a safe haven in this environment,” Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, told MarketWatch via phone. He said the fundamentals of tech firms are deteriorating as demand starts to soften alongside the onset of a potential economic slowdown. 

“That’s why tech companies are laying people off aggressively. They can get away with [fewer] employees now that demand is [lower], but they have to realize their revenues aren’t growing. They’ve got to cut their expenses.” 

See: More than 153,000 tech-sector employees have lost their jobs since the start of 2023

Suzuki of Richard Bernstein Advisors said his firm evaluates tech stocks from three prolonged lenses.

First, corporate profit, which shows deep declines across all areas of technology and technology-related sectors. 

Second, liquidity. Tech stocks are one of the biggest beneficiaries of the record liquidity environment with lower interest rates in recent years, but, as markets entered a period marked by historic tightening of conditions, the biggest tailwind has turned to a negative for growth stocks.

And third, valuations for the sector are still among the highest of any part in the entire market. “It’s hard to make the argument that you’ve had a major shift in the sentiment side of things when tech is still the most concentrated part within the U.S. market. They still hold the highest valuations there, so there really hasn’t been any sort of capitulation with regards to tech stocks,” Suzuki said. 

“Our basic expectation would be that growth will probably slow further from here, and that’s going to be negative for the tech sector, particularly when you combine it with the fact that their valuations are high and liquidities continue to tighten,” said Suzuki.

U.S. stocks extended their recent gains Thursday. The Nasdaq Composite gained 0.7%, while the S&P 500 rallied 0.5% and the Dow Jones Industrial Average
DJIA,
+1.26%
rose 0.4%.