Investors expecting technology stocks to continue a strong 2023 surge on enthusiasm over artificial intelligence are headed for “trouble” as central banks continue to tighten monetary policy, warned strategists at Bank of America on Friday.
In their weekly “Flow Show” note, the team led by Michael Hartnett, wrote that they see second-half “trouble rather than era of new AI rules.”
They said that the “best correlation” found in markets over the past 15 years was between central bank liquidity, with an “insane surge” from $5 trillion to $25 trillion, and tech stocks, with the Nasdaq rallying from 2,000 to 16,000.
Now, central bank balance sheets have shrunk by $3 trillion, “yet Nasdaq wants new highs,” they said, warning that “like ‘excess savings’ for Main St., ‘excess liquidity’ to run out for Wall Street.”
BofA Global Research
The analyst, in a chart (see above), said “Nouveau bulls” should also beware of a potential “double top” in the weighting for the so-called “magnificent seven” megacap tech stocks — Nvidia Corp.
NVDA,
-2.44%,
Apple Inc.
AAPL,
+1.28%,
Amazon.com Inc.
AMZN,
+1.04%,
Microsoft Corp.
MSFT,
+1.00%,
Alphabet Inc.
GOOG,
+0.24%,
Tesla Inc.
TSLA,
+3.74%
and Meta Platforms Inc.
META,
-0.44%
— in the S&P 500.
An AI frenzy ignited by earnings by chip maker Nvidia this spring helped supercharge a stock-market rally, but participation has remained narrow despite some bouts of broadening out. The rally has seen a setback in August as Treasury yields rose, with the rate on the 10-year note earlier this week hitting its highest since 2008.
The S&P 500
SPX
has pulled back 3.9% in August, leaving it with a year-to-date gain of nearly 15%, while the tech-heavy Nasdaq Composite
COMP
has declined 5.3% this month, but remains up nearly 30% for the year. The more cyclically oriented Dow Jones Industrial Average
DJIA
has retreated 3.3% in August, and is up just 3.8% in the year to date.
U.S. stocks were up modestly Friday afternoon, in a choppy trading session after Federal Reserve Chairman Jerome Powell warned the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that monetary policy would proceed cautiously.
This post was originally published on MarketWatch
