Potential Trouble Ahead for Technology Stocks

Investors who are banking on the continued growth of technology stocks in 2023 due to the excitement surrounding artificial intelligence may be in for a surprise. According to strategists at Bank of America, the tightening of monetary policy by central banks could spell trouble for these stocks.

Central Banks and Tech Stocks

In their weekly "Flow Show" note, the team at Bank of America, led by Michael Hartnett, highlighted the connection between central bank liquidity and the performance of tech stocks. Over the past 15 years, they observed a strong correlation between the two. As central bank liquidity surged from $5 trillion to $25 trillion, tech stocks, represented by the Nasdaq, experienced a significant rally from 2,000 to 16,000.

Shrinking Balance Sheets

However, the current situation is different. Central bank balance sheets have shrunk by $3 trillion, yet the Nasdaq is still aiming for new record highs. The team at Bank of America warns that just as "excess savings" for Main Street will eventually run out, "excess liquidity" for Wall Street may also dry up.

As an investor in the technology sector, it is crucial to consider the potential impact of tightening monetary policy on these stocks. While enthusiasm over artificial intelligence is undoubtedly high, it is essential to be aware of the broader market dynamics and the role of central banks.

Keep an eye on how technology stocks navigate the second half of 2023 as the era of new AI rules may not be as smooth as initially anticipated.

Potential Warning Signs in the Tech Stocks' Weighting

In a recent chart analysis, an analyst has raised concerns about a potential "double top" in the weighting of the renowned "magnificent seven" mega-cap tech stocks. These companies include Nvidia Corp., Apple Inc., Amazon.com Inc., Microsoft Corp., Alphabet Inc., Tesla Inc., and Meta Platforms Inc. The warning comes amidst an ongoing AI frenzy that was initially fueled by Nvidia's impressive earnings earlier this year.

While the stock market rally witnessed a surge, it has largely remained confined to a limited number of stocks. Although there were occasional signs of broadening market participation, the rally experienced a setback in August due to rising Treasury yields. Notably, the rate on the 10-year note reached its highest level since 2008 earlier this week.

Consequently, the S&P 500 has retracted by 3.9% this month, resulting in a year-to-date gain of approximately 15%. Similarly, the tech-heavy Nasdaq Composite has declined by 5.3% in August, but still maintains an overall increase of close to 30% for the year. On the other hand, the more cyclical Dow Jones Industrial Average has retreated by 3.3% this month, showing a modest 3.8% gain for the year.

While these figures highlight the recent setbacks in the market, investors should remain cautious about potential challenges that lay ahead for the tech sector.

U.S. Stocks Rise in Response to Fed Chairman's Cautionary Remarks

Friday afternoon, amidst a choppy session of trading, U.S. stocks showed a modest upward trend. This movement came as Federal Reserve Chairman Jerome Powell conveyed a warning regarding the potential necessity of further interest rate hikes. The purpose behind this action would be to regulate the robust U.S. economy and curb inflation. However, Mr. Powell also assured investors by emphasizing that any future monetary policy adjustments would be executed with utmost caution.