An upbeat start to the week is fading, with technology stocks poised to lead the market south. That is as a report makes the rounds that some Democratic lawmakers may be pushing for an effective breakup of big tech firms.
“Political pressure is building — lawmakers sniff votes in tackling big tech,” says Neil Wilson, chief market strategist for Markets.com. In other words, if Democrats win the White House and the Senate in November, that push could turn into real laws.
Now isn’t the time to abandon tech stocks, says our call of the day, from strategists at Citigroup led by Robert Buckland. He has moved the bank’s sector recommendation on tech stocks back to overweight (bullish).
“Of course, valuations look expensive, but the sector is likely to outperform if EPS (earnings per share) downgrades resume elsewhere,” said Buckland and the team. That positive view on tech stocks means they are also staying bullish on U.S. equities.
Citi believes cyclical stocks — tied to the economy’s fortunes — are most vulnerable to EPS cuts, which they see resuming within months. The strategists think consensus EPS estimates are too high and a second wave of COVID-19 infections may likely disrupt the economic recovery.
“In addition, IT [information technology] is a key beneficiary of lower real rates,” Buckland said. Real rates refer to the interest an investor or saver gets after adjusting for inflation. The charge higher for tech stocks has reflected a “relentless drop” in real yields, he said.
In a separate note, Buckland noted that tech stocks outperformed in 2019 as the Federal Reserve cut interest rates and real yields fell, and in March as equities and growth expectations dropped and those yields continued to fall. That outperformance has continued as quantitative easing has held down nominal yields — the interest an investor can expect to get from a bond.
What could finally burst the tech bubble, said Buckland, is if central banks tapering off that QE push up nominal and then real yields.
The analysts are also bullish on consumer staples, which they view as the best defense against rising inflation.
This article originally appeared on MarketWatch.
