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Will 2023 be the Recovery Year for Tech Stocks?

The tech sector has seen huge volatility over 2022, bearing the brunt of the oscillations in Fed tightening expectations and the USD outlook. Looking at two of the leading tech benchmarks, the Nasdaq and the XLK (SPDR Tech fund), both are down on the year, 27% and 23% respectively. 

Over recent months both markets have recovered off YTD lows leading traders to question what lies ahead for the tech sector as we cross over into early Q1 2023. Will the recovery continue or is a resumption of the bear trend on the cards? 

To assess the Q1 2023 prospects for the tech sector, let’s take a look at what’s driving the market and how these factors look set to develop moving forward. 

Key factors driving tech stocks

  • Fed expectations 
  • Inflation
  • China reopening

Shifting Fed expectations

The biggest factor driving movements in the tech sector currently has been the shift in expectations and outlook with regard to Fed tightening. Over recent months, the market became increasingly expectant that the Fed would pivot on rates in line with cooling inflation and growing concern for the economy. The sharp drop in October inflation was a big factor in the USD unwind we saw into Q4, helping lift risk sentiment across the board, which drove tech sentiment back into bullish territory. 

The December FOMC, which came on the back of data showing inflation cooled again in November, has helped cement this view. The Fed finally reduced the pace of rate hikes, hiking by 50bps and signalling a slower pace of hikes to come. On its own, this would have been firmly bullish for the tech sector. However, the outlook was made more complicated by the Fed lifting its peak rate projection to 5.1% in 2023 up from 4.8% prior.  The prospect of the Fed keeping rates at restrictive levels for longer has negative implications for growth and weighs heavily on the outlook for stock valuations, with those in the tech sector likely to suffer more. 

Inflation decides all 

However, while the near-term implications look skewed to the downside, there are some encouraging perspectives its worth considering here. The first is that the Fed has clearly set out its stall for 2023. The focus remains firmly on inflation and with that, comes some upside risk for the tech sector. If inflation continues to cool at the current pace or quicker, markets are likely to move sharply higher as traders begin pricing in a quicker end to the Fed’s tightening cycle. In these conditions, the tech sector should be the biggest beneficiary among US stocks as traders move capital out of defensive blue-chip assets into more aggressive higher-yielding stocks in the tech sector. 

China reopening a key factor to watch 

One further factor to consider is the prospect of China reopening in Q1. There had been some speculation in early Q4 on the back of a leaked (alleged) internal Chinese government memo alluding to a planned March date for reopening the Chinese economy. We saw plenty of initial equities upside, particularly in tech, in reaction to this. While this story was promptly put down by Chinese authorities, subsequent events have thrown the China reopening story back into the limelight. On the back of recent protests across China, the government has begun scaling back many covid restrictions, for the first time since the pandemic took hold. The trajectory of these actions is fuelling speculation that the government is indeed looking towards a full reopening of the Chinese economy. Given the importance of the Chinese market for the tech sector, such a reopening would be a huge boost for demand and should see tech stocks rallying sharply. Additionally, the boost to global trade should propel risk appetite back into encouraging territory, adding further bullish support for tech stocks. 

Upside risks for tech sector

In light of these factors, tech stocks look promising into early 2023. While the initial disappointment of a more hawkish Fed outlook is a limiting factor for now, it opens the way to sharp upward movements in positioning if we see any challenge or change to this view (e.g sharply falling inflation) into next year. Furthermore, any headlines around China reopening should help lift tech stocks with a confirmed reopening likely to fuel a solid lift in bullish momentum. 

Nasdaq weekly chart 

 

The market is currently stalled at a test of the bear channel top following the reversal higher off the YTD lows. While some downside from here looks reasonable, the key area to watch will be a test of the 11038.11 support. While this holds, a further rally back towards 12626.41 (and a channel break) looks likely into Q1 2023. However, should the price slip below that level, attention shifts back towards 9735.47 initially. 

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