Tech stocks rebounded, delivering stellar gains so far this year. For instance, shares of big tech giants like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), and Nvidia (NASDAQ:NVDA) have defied the weak general market trend and are up about 39%, 41%, 43%, 49%, 126%, and 168%, respectively, on a year-to-date basis. While the rally reflects equity investors’ buoyant mood on tech stocks, Morgan Stanley’s strategist Mike Wilson anticipates the possibility of a downturn or a correction in the technology sector.
Tech Stocks – The Recent Past and Near Future
Contrary to the fears of a recession gripping the market in 2023, the economy has proven to be less severe than anticipated. Although the market still exhibits weakness, the expectations of easing monetary policy due to the moderation in the inflation rate, the lower valuation of tech stocks at the start of 2022, and the concerted efforts of these companies to implement cost-cutting measures have all contributed to a revival in their stock prices.
Adding to the growth of these tech stocks is the evolution of AI (Artificial Intelligence). Investors have been bullish about anything and everything related to AI. Interestingly, not only individual stocks but tech and AI-focussed ETFs (Exchange-Traded funds) have also seen large inflows of cash.
While investors’ sentiment has largely been positive, Wilson maintains a bearish tone. Back in April, Wilson warned that tech stocks would not be able to sustain their recent gains. More recently, the U.S. equity strategist said that a decline in corporate earnings would lead to a correction in stocks. He expects a disappointing performance in the second-half earnings of U.S. corporations, leading to a selloff in equities.
While Wilson reiterated his bearish call on tech stocks and the broader market, let’s check out what’s on the horizon for these tech giants.
The Upside Potential Remains Low
TipRanks’ Stock Comparison tool shows that the Top Wall Street analysts are bullish about these tech stocks. All of these stocks, except for Apple, command a Strong Buy consensus rating on TipRanks. However, the upside in the shares of these companies based on analysts’ average price targets shows limited upside potential.
Nvidia, which has gained the most among these companies, is the only stock offering double-digit upside potential based on the average price target.
Moreover, investors should note that NVDA, AAPL, and MSFT stocks have recouped all of their post-pandemic losses and are trading near their all-time highs. Meanwhile, Alphabet stock has recovered most of its lost ground and has significantly outperformed the broader markets.
However, Amazon and Meta stocks have lagged the S&P 500 index over the 5-year period and are yet to recover most of their pandemic gains.
The recent rally and macro uncertainty could limit the upside in tech stocks in the near term. Analysts’ average price targets also substantiate this view. While most of these stocks carry a Strong Buy consensus rating, only Apple and Nvidia stocks have the “Perfect 10” Smart Score.
However, NVDA, with a Strong Buy consensus rating and a Perfect 10 Smart Score, appeals the most, based on TipRanks’ valuable datasets and tools.
The chip company has benefitted a lot from the rise of generative AI and its dominant position in that space. NVDA is poised to deliver solid growth on the back of solid demand for its AI chips. Meanwhile, autonomous driving and high-end infotainment could further support growth in the auto segment, noted Christopher Rolland of Susquehanna.
The recent surge in NVDA stock has driven its valuation higher. However, the analyst believes that its premium valuation is warranted as NVDA is well-positioned to capitalize on its growing end markets.