Investors are looking beyond the U.S. technology sector’s bounceback this year for longer-term returns, as higher interest rates and an uncertain macroeconomic picture could present further headwinds, fund managers and strategists said.
The tech-heavy Nasdaq Composite has jumped 21% this year, more than doubling the S&P 500′s 9% rise, boosted by stronger-than-expected earnings and cost-cutting measures from major companies, along with expectations that the U.S. Federal Reserve’s hiking cycle is nearing an end.
Longer term, other sectors are likely to offer better returns at more attractive valuations, said Abigail Yoder, U.S. equity strategist at J.P. Morgan Private Bank.
“The tendency is that ... the sector that leads in one cycle doesn’t tend to lead in the following cycle,” Yoder told the Reuters Global Markets Forum.
The Nasdaq’s current performance is a significant turnaround from 2022′s 33% drop, its worst year since the 2008 financial crisis, but the risks posed by higher interest rates and a potential U.S. economic slowdown have not faded.
“We are staying away from the more interest rate-sensitive sectors such as tech,” said Jonathan Mondillo, head of North American fixed income at abrdn.
Anticipating an economic slowdown in the second half, more cautious and selective positioning across fixed income portfolios is a better bet, said Jonathan Duensing, head of U.S. fixed income at Amundi.
“We’ve always felt that the tech sector in general is one where you need to be very selective,” Duensing said.
Abrdn’s base case is a likely recession in the fourth quarter of 2023. Based on that, Mondillo prefers credit in more defensive sectors, including healthcare and consumer staples, over technology.
Similarly, Yoder sees healthcare as an attractive defensive option in the face of recession, with mid-cap stocks likely to outperform their larger counterparts.
“Longer term, we prefer actually mid-caps, which tend to be higher quality in nature, and tend to exhibit a really good up/down capture over time,” she said.
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