This time last year, I was relatively optimistic in relation to the prospects for Apple, Microsoft, Alphabet, and Amazon – the four ‘Big Tech’ stocks I own. These stocks had a lot of momentum and I thought it would continue.
I was wrong however. This year, all four have taken a big hit as interest rates have risen and investors have shunned expensive growth stocks. Amazon has performed the worst of the four, falling around 50%.
Can these stocks stage a rebound in 2023? Or is there further weakness ahead. Here’s my take.
A rebound in 2023?
In my view, there are a couple of scenarios that could lead to a rebound for Big Tech next year. The first is a monetary policy pivot from the US Federal Reserve.
Right now, the Fed is hiking interest rates aggressively. This year, it has raised rates from near zero to 4.25-4.5%. And economists expect the central bank to take rates above 5% in 2023. These hikes are putting pressure on the Big Tech stocks due to their above-average valuations.
Now if the Fed was to signal it has finished hiking rates, I think we could see sentiment towards the Big Tech stocks improve dramatically. This could lead to a rebound in their share prices.
Of course, if inflation was to remain high in 2023, the Fed may keep hiking rates aggressively. If so, Big Tech stocks may continue to underperform.
Lower growth could help Big Tech
The second scenario that could lead to a rebound for these stocks is weak economic growth in the US or globally. In this scenario, I’d expect investors to move away from cyclical stocks (which would most likely be negatively impacted by the weak macro environment), and gravitate towards companies that are actually generating a healthy level of growth.
This could favour the four Big Tech stocks, as all are still generating solid top-line growth right now. Microsoft, for example, generated revenue growth of 11% last quarter (16% in constant currency).
Four different companies
One thing that’s worth noting here is that these four companies are very different businesses. This means they are going to be impacted by different forces.
Amazon generates the bulk of its revenues from online shopping and cloud computing. So its fortunes are linked to consumer and enterprise spending.
Alphabet generates the bulk of its revenues from digital advertising. And advertising demand tends to fluctuate with the economy.
Apple makes most of its money from selling hardware. This means it’s dependent on consumer spending and robust supply chains.
Microsoft generates revenues from business productivity solutions, video gaming, and cloud computing. So it’s dependent on enterprise spending and the strength of the gaming industry.
Given their different drivers, we could potentially see a scenario in which some of the Big Tech stocks stage a rebound in the near term while others don’t.
I’m a long-term bull
In the long run however, I expect all four stocks to climb higher. All four operate in growth industries and have strong competitive advantages.
So I plan to buy more shares in these four companies when I have capital to invest.
