Veteran Market Watcher Says Big Techs Rebound Has ‘run Its Course—but The Overall Stock Market Could Still Rise To Near A Record High This Year

© Michael Nagle/Xinhua via Getty Images Trader at the New York Stock Exchange, April 20, 2023.

All eyes are on this week's big tech gains: Microsoft and Google parent Alphabet are expected to report after Tuesday's call, followed later in the week by Facebook's own Meta and Amazon.

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After tech stocks fell 30% last year and some big tech companies took a turn for the worse, 2023 was a recovery year for the industry. Alphabet shares are up nearly 18%, Microsoft shares are up more than 15%, and Amazon and Meta shares are up 21% and 67%, respectively.

The strong performance comes after more than a year of aggressive rate hikes by the Federal Reserve, which tend to weigh on stocks, and repeated recession warnings from Wall Street. But despite the challenges, the US economy and stock market remained strong. The S&P 500 is up 7% year-to-date, the unemployment rate hovered near a record low of 3.5% last month and the Federal Reserve Bank of Atlanta expects GDP to grow 2.5% in the first three months.

"There is a growing sense that corporate America can successfully handle higher than expected interest rates, and that is attracting more buyers of stocks," George Ball, president of Sanders Morris Harris, an investment firm, told clients. of $4.9 billion in Houston. . , Fortune magazine reported Tuesday.

Paul believes the recent strength of the US economy in the face of persistent inflation and interest rate hikes could help the market continue its recovery this year, but the rise of big tech companies is another story that "runs its course".

"We expect markets in general to return to a record high sometime in 2023, but most likely not because of big tech," he said. Instead, we think smaller tech stocks are likely to lead the market.

To recover near all-time highs, stocks have had to make significant gains. The Dow Jones Industrial Average is still 9% below its January 2022 high of 36,799, while the S&P 500 is down 17% from its late-2021 high of 4,783.

Big tech or little tech

The key to Paul's theory that small-cap tech stocks will outperform their large-cap rivals this year is revenue growth. He argues that due to the size of large technology companies, it will be "almost impossible" for them to continue growing at the same rate as in the past decade.

"Therefore, the growth potential after a partial recovery is medium quality at best. There are almost unlimited growth opportunities for small but well-established technology companies," he said.

Small tech stocks, which have fallen 50% to 80% since the market peaked in late 2021, have value, Paul argued. "All have a strong cash position" and "opportunity to improve margins."

The veteran investor added that even if small tech stocks win, he doesn't think 2023 will be a great year for the stock market, but that doesn't mean investors should hide in cash.

"Keep investing, but be sure to avoid speculative excess. This is going to be a three-yard, dust cloud year, not a 60-yard TD pass," referring to a tough football game. "The tortoise will beat the hare again."

Still others are cautious

While Paul and other bullish analysts think stocks will continue to rise in 2023 as the economy strengthens, not everyone on Wall Street is so sure. Chris Haverland, a global equity analyst at the Wells Fargo Investment Institute, said Tuesday he expects a recession later this year that will "hit corporate earnings and limit the short-term rally in stock prices."

"While some are calling this a new bull market, we caution investors that bear markets rarely end before an economic downturn or as the Fed continues to tighten monetary policy," he wrote.

Using history as a guide, Haverland argued that the bear market would not end until the recession was in full swing and the Federal Reserve was dovish. "When things go wrong, stock markets often don't fall to their lowest levels until the first rate cut," he said. Until then, we propose to remain in ministerial portfolios on defense."

This story was originally published on Fortune.com.

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