Tech stocks will jump 20% in 2023 by dodging Fed headwinds after this year's 'horror show,' Wedbush says
The tech sector's plunge into a bear market in 2022 will be followed by a 20% surge in 2023, Wedbush's Dan Ives projects.
The Fed is in the "7th inning" of rate hikes, and companies preparing to guard margins set up a choppy but upside path for tech shares.
The tech-concentrated Nasdaq 100 is staring at loss of more than 30% in 2022.
This year's plunge in technology stocks – Apple and Amazon among them – will give way to a sharp rebound in 2023 as companies work to protect profitability and the Federal Reserve winds down its rate-hike campaign, Wedbush Securities said.
"[In] this carnage we see growth opportunities as we believe overall the tech sector will be up roughly 20% in 2023 from current levels with Big Tech, software, and semis leading the charge despite the macro/Fed wild cards," analyst Dan Ives wrote in a note published Friday.
"Carnage" refers to the more than 30% slide this year in the Nasdaq 100 and Nasdaq Composite, indexes that house technology stocks like behemoths Meta and Microsoft. Meanwhile, the S&P 500's Information Technology sector is carrying a nearly 29% loss, making it the third-worst performing group on the broad-equity index.
The latest easy-money era came to an end this year as the Fed raised its benchmark interest rate by 425 basis points to cool down inflation by slowing economic activity. Tech stocks in particular were hit hard as the pick-up in borrowing costs can hurt the value of potential profits. Also, the Fed's rate hikes lifted bond yields, making relatively riskier tech stocks less attractive to buy.
"For tech bulls like ourselves this past year has been a horror show, as this backdrop has put massive pressure on tech stocks with many names down 40%-50% from highs," said Ives.
Meta, for one, is looking at a 65% drop year-to-date. Amazon's stock price has been nearly halved to just below $85 a share, and Google's parent Alphabet has tumbled close to 40%.
But Ives foresees a "choppy, yet positive" path for well-positioned companies in 2023. "This is as under-owned we have seen tech stocks going back to the 2009/2010 timeframe and in our opinion represents great entry levels for long-term investors."
Signs of resilience
Meta, Microsoft, Amazon, and Alphabet have started work to "keep margins still intact" by cutting costs and curbing non-strategic areas of spending to withstand what major banks and economists see as an oncoming recession. Among the cost cuts, thousands of tech workers have been laid off in recent weeks, with reductions at Meta and Amazon among them.
Spending for cloud, software, cyber security and other areas of tech should stay firm next year, with modeling and whisper numbers from Wall Street already factoring in a potentially bleak macro picture over the next six to nine months, Ives said.
"The combination of a Fed in the 7th inning of rate hikes, tech valuations below the last five-year average levels, tech growth into 2023 showing isolated signs of resilience based on our recent checks industry data, and a slew of M&A set to hit the tech sector in 2023 is a bullish set up for tech, in our view," he said.
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