Nasdaq Soars Nearly 40%

After the Nasdaq Composite surged nearly 40%, investors are divided on whether to take profits and shift to other areas of the market or to double down on the sector. Wall Street strategists say: Four factors will maintain the "all-star" status of tech stocks in the second half of the year...

Following a nearly 40% increase in the Nasdaq Composite in the first half of this year, some investors are divided on whether to take profits and shift to other areas of the market or to double down on the sector.

The recent surge has been triggered by Nvidia's significant increase in earnings expectations, with the chipmaker benefiting from the growing popularity of artificial intelligence technology. As the second-quarter earnings season kicks off later this week, investors will attempt to assess how long the profit growth of tech companies will last.

Larry Adam, Chief Investment Officer at investment bank Raymond James, said in a report last Friday that this growth should continue, and tech stocks should maintain their "all-star" status after being awarded the "MVP" (Most Valuable Player) title in the first half of this year.

"So far, the tech sector's performance has set a record. The sector has recorded the best first-half performance on record, outperforming the S&P 500 by the largest margin since 1999."

Here are four reasons why Raymond James expects tech stocks to maintain their "all-star" status in the second half of 2023.

First, tech stocks are not as expensive as they appear.

Tech stocks are about 1% below their all-time high set in December 2021. Since then, earnings in the sector have grown by about 5%, which means that despite tech stocks being close to their all-time highs, their valuations have improved. Moreover, the sector has a history of exceeding expectations.

Adam said, "Although the tech sector is trading at a 42% premium to the S&P 500 on a forward 12-month basis, which is the highest among all sectors, the tech sector has generally outperformed other sectors in terms of exceeding expectations over the past decade, making it cheaper than current valuation expectations."

Second, tech companies have high profits.The significant stock market sell-off in 2022 has shifted tech executives' focus from growth to profitability. Consequently, over the past few months, they have prioritized improving efficiency and making substantial cost cuts to maintain or enhance profit margins. These efforts have paid off, with the tech industry maintaining the highest profit margins across all sectors at 24%, significantly exceeding the S&P 500's 12% profit margin.

"Given the possibility of the economy entering a mild recession in the fourth quarter of 2023, we may be entering a period where returns are more challenging. Corporate net profits will become a focal point for investors, and tech companies have proven their ability to deliver on this front," said Adam.

Thirdly, tech-led investment. The recent wave of artificial intelligence highlights a fact that an increasing number of companies are directing their spending towards the tech sector. Adam emphasized that over 200 companies mentioned "artificial intelligence" in their first-quarter earnings calls and added that a recent industry survey showed that about 65% of companies plan to invest in AI. He stated:

"Tech spending has accounted for 62% of total corporate fixed investment, up from 35% in 2000. The continuation or acceleration of this trend will continue to support the profitability of tech companies."

Fourth, tech companies have become more diversified. Since the dot-com bubble, tech companies have become more diversified, which should increase the resilience of the industry.

"For tech companies with massive market capitalizations, less than 50% of their revenue comes from tech-related products. Instead, the majority of their revenue is more service-oriented, coming from the non-essential consumer goods, communication services, finance, and healthcare sectors."