There’s one sector that shouldn’t cool off as the weather turns colder, and it’s tech.
Though the S&P 500 Information Technology index is up roughly 21% this year, some bullish analysts see a strong further rally in tech stocks through the rest of 2021, juiced by the Federal Reserve’s steady and soothing messaging and the sector’s strong fundamentals.
“We believe Fedspeak and messaging coming out of Jackson Hole is very bullish for tech stocks with an ‘all clear for risk-on assets’ in the near-term led by tech stocks,” Wedbush’s Dan Ives wrote in a Sunday note. “The fear of a more hawkish Fed/Powell and rates rising sooner has been a lingering worry for the Street that threatened to put the pause on the ongoing tech and market rally in our opinion.”
Already on Monday, the tech-heavy Nasdaq had popped over 0.8% as of midday trading. Ives wrote that his tech bullishness is “predicated on our multiyear thesis that the digital transformation story across the consumer and enterprise ecosystem is still in the early innings of playing out.” He added, “We believe massive growth is still on the horizon with tech stocks and FAANG names underestimating this surge of demand for the next 2–3 years.”
And Ives is willing to put a number on the near-term effects of that surge: He sees tech stocks rising 7% to 10% through year’s end.
That’s not to say there isn’t a headwind or two facing the beloved sector, including the ongoing interest rate watch and the sheer multiples at which tech trades (per S&P Global data, the sector is trading over 30 times earnings). Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, says valuations are hovering around cycle highs. “We do think there’s an upward bias to interest rates in the back half of the year, and with tech stocks trading at pretty full valuations, that’s just going to be a problem,” he tells Fortune.
Rising regulatory tensions in China have put Chinese tech stocks in jeopardy. But stateside, Wedbush’s Ives argued, “we believe these dynamics will yet again bode well for U.S. tech stocks as the favorable backdrop and rotation away from Chinese tech into U.S. tech creates a ‘nirvana set up’ for FAANG names and the tech sector into the next 6 to 9 months.”
Meanwhile, analysts see factors in the short run that could work in tech’s favor even if they hurt the broader economy. “A lot of trends, whether it’s working from home, whether it’s things like streaming content, whether it’s ordering things online—all those things are kind of being powered by software and automation and hardware; so a lot of that is working in tech’s favor,” Samana says. (Those trends also bode well for cloud and cybersecurity stocks, which Ives favors.) And with the Delta variant still dominating headlines, “if you’re worried about Delta, you buy tech,” Samana adds.
Given the “scarcity of growth names/winners in this market looking ahead,” according to Ives, the tech run can continue through year’s end and into 2022.
As to what names Ives likes? Heading into the fall, he recommends owning “the secular winners in FAANG” (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google), with Apple as his top pick; cloud stocks like Microsoft, DocuSign, Nice, and Pegasystems; and cybersecurity picks including Zscaler, Varonis Systems, CyberArk Software, Telos Corp., Tenable, Fortinet, Palo Alto Networks, and SailPoint Technologies.
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