The rally in tech stocks has become one of the big market stories of early 2023 trading. On the back of the seismic declines we saw across the sector last year, tech stocks are making a big comeback this year.
Looking at the major tech indices and ETFs, it’s clear to see that sentiment towards the sector has changed. Many individual stocks have been making bumper gains this year despite Q4 earnings painting a mixed picture of recent performance. Given that tech stocks typically trade at a higher beta to other sectors within the overall risk complex, traders are eager to join any rally as the volatility associated with the sector offers potential for attractive upside.
However, the tech sector is a saturated place and big names such as Tesla, Apple, and Amazon make up some of the most heavily traded stocks currently. As such, it can often be more attractive for traders to look for tech opportunities in less crowded places. One way of doing this is to hunt out tech stocks with low P:E ratios, suggesting room for a strong upside should the tech rally continue. Let’s take a look at some of these opportunities below.
What’s driving the changing sentiment in tech stocks?
Before we get onto that, let’s quickly recap what has changed from a fundamental perspective to drive this shift in sentiment towards tech stocks. Simply put, the main driver behind the rally in tech stocks is the shift in outlook for the Fed. Over much of last year, USD was soaring as traders played catch up with increasingly aggressive Fed tightening. The sharp upward shift in US rates along with hawkish market expectations saw risk assets plunging in value with tech stocks the worst hit.
However, with the Fed having recently pivoted on rates, twice, and with chairman Powell acknowledging that the disinflation process is underway in the US, tech stocks are rallying again as USD comes off. Added to this backdrop, surprise strength in recent US data suggests that any recession this year will not be as bad as previously forecast, if it occurs at all, adding further support for high-yielding tech stocks near-term. With inflation forecast to continue coming down and US rates increasingly expected to end ahead of the Fed’s current projected end date, tech stocks look primed for continued gains in coming quarters.
High value stocks to watch
- Applied materials
This Nasdaq listed company specialises in materials engineering solutions for the semi-conductor industry. Given the massive global demand for semiconductors AM looks well positioned to benefit from any ongoing rally in the tech sector, which in itself will fuel further demand for semiconductors. AM is due to report Q4 earnings next week with the market looking for EPS of $1.932 and revenues of $6.687 billion. This will mark a strong uptick from the prior quarter which itself saw a 17% upside surprise and should keep the stock well supported near-term.
- Skywork solutions
Another Nasdaq listed company; SS is also in the semiconductor business. The company produces radio frequency and complete semiconductor systems for mobile and comms apps. SS is one of the two leading global providers of these systems and as with AM, a broader tech rally over 2023 should feed into higher demand for its services and products, particularly with Apple being a main customer. The company reported Q4 earnings this week and saw its stock rally over 13% on better-than-forecast results. SS reported Q4 EPS of $2.59 vs 2.58 expected and revenues of $1.329 billion vs $1.323 billion forecast.
The final Nasdaq listed stock to consider is NetApp. Slightly different from the prior two, NA is a cloud and data management company which has just been given a strong buy rating from Citi due to the company rapidly gaining market share. The company recently announced it will cut its global workforce by around 8% which should reduce costs materially going forward. Looking ahead, NA is due to report Q4 earnings this month with forecasts for EPS of $1.60 on revenues of $1.611 billion.
Finally, let's end by taking a look at the technical chart of the Nasdaq to get a broader view of the tech sector as a whole in light of the sentiment shift we’ve seen in recent months.
Nasdaq – weekly chart
Source: TradingView / FlowBank
The rally off the 11038.11 lows in the Nasdaq has seen the index breaking above the bear channel top and above the local 12091.61 highs. Price is currently stalling just ahead of the 12953.25 level. However, in light of the channel break, the outlook remains bullish while the market holds above 12091.61, with a break of 12953.25 and a continuation towards 13768.74 the preferred play in the coming weeks.