Is it time to bet on tech stocks again?

Fund managers are engaged in frantic analysis to find the right price for tech stocks. At the same time, U.S. retail investors are happy to buy back these stocks, now priced low and with good growth prospects due to falling inflation expectations from the start of 2023.

Analysts are somewhat unnerved after the earnings guidance failures seen at the largest technology companies, which are cutting tens of thousands of jobs and reducing expenses that will impede healthy growth.

For now, fears of a hasty inflation slowdown that will bring recession are winning out.

After a miserable 2022, the S&P 500 is up 7 percent and the Nasdaq is up 13 percent year-to-date (through Feb. 24, 2023).

This rally has been driven by some of last year’s hardest hit companies. Netflix, Tesla and Meta are up 18 percent, 40 percent and 82 percent, respectively.

The Ark Innovation ETF, which was a symbol of the tech stock bubble in 2021 when it topped $150 per share before crumbling to $30 by the end of 2022, is now back up nearly 30 percent.

Even Coinbase, the cryptocurrency exchange, is up 70 percent this year.

Tech stocks: buy or sell

At Blue Whale Growth, they are skeptical that the underlying investment case for many of these companies has changed this year. “Have Netflix’s earnings fundamentals changed for the next five years? Probably not, but it’s still up a lot,” they say at the British investment fund in a note published last week.

Blue Whale Growth sold Amazon and Alphabet last year on the thesis that consumers would suffer in the recession.

“We are still very bearish on consumer technology and advertising. Higher mortgage rates have yet to kick in properly and digital advertising is unlikely to continue to gain market share at the same pace,” explained from the Fund.

BWG’s theory was based on the results of the largest U.S. technology companies Apple, Amazon and Google did not meet analysts’ forecasts and saw their profits fall substantially.

Meta was the only positive surprise, as its revenue fell more slowly than expected. It also announced that it would be able to cut more expenses than it originally thought. But it was not bullish.

Contradictory information

In the short term, BWG accepts that interest will drive markets. However, at the Fund they have faith that earnings growth is what matters in the long term.

They cite Microsoft, a company in which Blue Whale has positions. “Its stock price has fluctuated, but over the past five years its earnings have grown by about 200 percent, as has its market capitalization,” they say.

The other factor that can boost stock prices in the short term is retail investors.

A report from JP Morgan found that January had the most retail investor activity since last summer.

The investment bank has an index of “retail favorites” that has shown a strong recovery this year relative to the S&P 500. “This relative performance indicator rebounded in recent weeks, pointing to renewed risk on the part of younger cohorts,” the bank said in a statement.

Despite the recovery, the market is still well below last year and BWG is eager to point out that it is easier to grow faster from a lower base.

The surprisingly strong U.S. jobs report that showed record low unemployment has also generated massive selling in recent days.

The 10-year US Treasury yield has risen 30 basis points and the market has given up some of its gains as a result.

Whether U.S. retail investors stick around a little longer this time remains to be seen.