It’s that time again when Wall Street rolls out its forecasts for the forthcoming year.
Where tech stocks are concerned, Morgan Stanley Wealth Management’s equity strategists have released a view that quite literally flips 2018 on its head.
The strategists compared the past five years of the bull market, since the S&P 500 reclaimed its previous high in 2013, to the dotcom-bubble rally from 1995 through 2000, and observed a number of similarities.
Notably, the tech-heavy Nasdaq composite’s returns bested the broader S&P 500 index during both periods. Also, growth stocks far outperformed value and US stocks beat international equities.
Another déjà vu could manifest in what happens when investors finally rotate out of the big winners.
“Interestingly, the indexes that performed best during the run-up also tended to fare worst during the following drawdown,” a team of strategists including Vijay Chandar said in a recent client note.
“Convincingly, this relationship also tended to hold if you instead looked at the subsequent peak-to-peak performance in the 2000-to-2007 cycle. Looking ahead, we think the relative picture might follow a similar pattern, with those areas of the market that have been out of favor reversing in the coming year and outperforming the prior market leaders.”
What the chart below shows is that the pattern went both ways — laggards became the biggest winners. That could augur well for emerging markets, which have trailed US stocks this year and in the 2013-2018 period.
Chandar and his colleagues were sending clients a different message on tech back in 2015, when the Nasdaq composite reclaimed its tech-bubble high above 5,000.
Back then, like now, many were wondering whether another tech bubble was inflating.
But the strategists pointed out that in 1999, fewer than half of tech companies were profitable with positive operating margins, versus more than 90% in subsequent years. They advised that security, mobile/social, analytics, and cloud computing were attractive growth areas.
They equally flagged risks to tech stocks’ growth, including tighter monetary policy and slower global growth leading to less consumer spending.
Nearly four years later, it has paid investors to be bullish on tech. However, Chandar is now telling wealth-management clients that like the aftermath of the dotcom bubble, the market’s biggest winners might be its biggest losers when this rally ends.
Morgan Stanley’s firm-wide equity strategists recently went to an underweight on tech, partly because of their concerns about the trade war. They had incorrectly forecast that weakness in tech and small-cap stocks would push the S&P 500 lower. But even after a mea culpa of sorts published in late-September, they maintained that growth stocks were poised to weaken as financial conditions tightened and earnings growth peaked.
“We still think that US growth stocks and small caps can underperform in the absence of a meaningful drawdown for the S&P 500,” said Michael Wilson, the chief US equity strategist.