Expect Big Tech Headwinds, Opportunities in 2023

For the purposes of this article “big tech” or “tech” reference the technology, communication services and consumer discretionary sectors – groups that combine for nearly 80% of the Nasdaq-100 Index (NDX).

Marking an unceremonious end to what was a more than decade’s worth of out-performance by big growth stocks, NDX tumbled 32.6% last year. Issues including currency volatility, rising interest rates, supply chain woes and staffing inefficiencies plagued big tech in 2022 and resulted in the trio of aforementioned sectors being the three worst-performing groups in the S&P 500.

Further underscoring the brutality of 2022 for tech stocks is the point that, on an aggregate basis, they shed more than $2.5 trillion in market capitalization. Putting that figure into context, it’s roughly the GDP of France.

Tech weakness puts advisors in a tough spot because it’s the biggest sector in the U.S., meaning it’s a dominant force in a slew of broad-based equity funds. Likewise, clients not only came to expect tech leadership, their everyday consumption of products and services from mega-cap growth companies can prompt visions of investing grandeur. All of that is to say advisors have some work to do this year when to assuaging skittish clients when it comes to tech.

Consumer, Currencies Crimped Tech in 2022

As noted above diminished consumer spending coupled with currency volatility were among the issues confounding tech stocks in 2022. The former is the result of high inflation and apprehension that a recession is looming, if not already here. The latter results from the strong dollar – a drag on export sensitive companies of which plenty are growth firms.

Translation: Rising interest rates, which were used to cool inflation, made the dollar the world’s best-performing major currency last year, dragging on the likes of Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), among others. The pain was particularly acute at those companies’ cloud computing units, Amazon Web Services (AWS) and Azure.

“In our view, Microsoft’s results speak to a more challenging environment for the near future,” said Mark Murphy, Head of the U.S. Enterprise Software research team at J.P. Morgan. “This serves as an unwelcome reminder of how the tangled web of inflationary cost pressures can create a minefield by reaching into overlooked corners of a business.” 

Neither advisors nor clients need to stay abreast of it on daily basis this year, but it’s a near certainty that tech layoffs will be a theme in 2023. Of course, that’s bad for workers, but it could be positive for stocks over the long haul. Facebook parent Meta Platforms (NASDAQ:META), which resides at depressed levels, got the ball rolling in 2022.

“During its recent third-quarter earnings call, Meta reported that overall revenue fell 4% year-on-year, largely driven by softening advertising sales against a challenging macro backdrop and heightened competitive pressures. Additionally, the company’s expenditure around the metaverse remains high. In November 2022, CEO Mark Zuckerberg cut 11,000 jobs (around 13% of Meta’s workforce) and announced a hiring freeze. The company is also decreasing its discretionary spending in other areas — specifically, by scaling back budgets, reducing perks and shrinking its global real estate footprint,” adds J.P. Morgan.

What to Watch for in 2023

In the essence of keeping things simple for tech-enthusiastic clients, advisors can accurately tell them that essentially all of the issues that afflicted growth stocks in 2022 will be at play this year, meaning help from lower inflation and a weaker dollar is essential.

On a longer-term note, tech companies aren’t necessarily caught up in short-term headwinds and macroeconomic gyrations. Good news: They’re still investing in fashion to deliver for patients clients/investors.

“This includes leaning into a smaller number of high-priority growth areas. For instance, Amazon’s Prime offering and flexibility in pushing first-party versus third-party inventory will serve as major advantages for its retail business in 2023 and its multi-year head start in cloud computing will cement AWS as a global market leader. Alphabet will seek to diversify its revenue streams by developing its non-ad businesses, such as Google Cloud. As for Meta, the company is expected to remain focused on its new AI discovery engine, its ads and business platforms, and its multi-year transition to the metaverse,” concludes J.P. Morgan.

Related: Need-to-Know Retirement Laws for Advisors, Clients