(Bloomberg) — A prolonged period of economic decline in the US will roil technology stocks at a time when they are attracting a weight of investor money, according to Bank of America Corp. strategists.
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A team led by Michael Hartnett expects a recession “to crack credit and tech” just as it did in 2008, they wrote in a note on Friday.
Investors poured $3.8 billion into technology stocks in the week through May 10, the largest inflow since December 2021, BofA said, citing EPFR Global data. On the flip side, $2.1 billion was pulled from financial equities, the biggest redemption since May 2022, amid turmoil among regional banks in the US.
The tech-heavy Nasdaq 100 has soared 22% this year as investors anticipate the Federal Reserve will soon start easing monetary policy, relieving pressure on the rate-sensitive sector. And while the sector’s earnings are set to extend a drop from last year, traders are already anticipating a recovery in 2024.
Hartnett, who correctly predicted last year that recession fears would fuel a stock exodus, warned that the US central bank is unlikely to pause hiking amid high inflation as well as low unemployment and presidential approval rates. That’s similar to Bloomberg Intelligence strategists, who see room for a bubble in tech, media and telecommunication stocks to deflate as they “face the reality of higher-for-longer interest rates and a tempered earnings outlook.”
To be sure, Hartnett said a negative payrolls print would be buy signal for cyclical stocks tied to the economy — like technology stocks — in 2023. The labor market has been resilient in the US, with hiring and workers’ pay gains accelerating in April.
Among other notable flows in the latest week, the pace of inflows into cash is slowing, with $13.8 billion going into the asset class. Meanwhile, Treasuries saw the largest inflow in six weeks at $6.3 billion. US and European equity funds each had redemptions at $2.7 billion and $2.2 billion, respectively.
–With assistance from Thyagaraju Adinarayan.
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