The harsh reality for investors eyeing tech stocks in 2023

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Monday, January 2, 2023

Today’s newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Read this and more market news on the go with Yahoo Finance App.

Yes, markets are closed today.

So you are probably wondering why I’m delivering a Morning Brief newsletter directly to your inbox.

The answer to that question is simple: If you aren’t seeking to get better as an investor every single day — even on days the market is closed — you are likely to lose in the long run.

And you best believe others worldwide are trying to improve around the clock. Eat or be eaten in global markets.

To that end, I offer up a quick investing lesson for those who might be preparing to go whole hog buying battered-down tech stocks right out of the gate in 2023.

We all know the backdrop for tech entering the New Year.

Chew on this exchange myself and colleague Brad Smith had with veteran tech analyst Mark Mahaney at Evercore ISI on Yahoo Finance Live last week:

Yahoo Finance: Can tech rebound without a Fed pivot or at least a pause?

Mahaney: I’m pausing on your pause question. So I guess the answer is, no, it can’t. But it’s the magnitude of the move. And so going from zero to expectations of 4%-plus, 4% to 5%, that’s a massive move. And going from here going forward, I just don’t think the interest rate shock is going to be as great as what we have seen this last year. So that’s sort of the answer to your question. I think if rates keep rising and the Fed remains hawkish, it’s going to be very hard for growth tech stocks to materially outperform. I don’t think they would underperform in the way they did this year.

We stumped friend-of-the-show Mark, underscoring how tricky picking tech stocks is at the moment.

Investor sentiment is low on what tech companies can produce in terms of top- and bottom-line results this year, as most economists and investors are bracing for sluggish economic growth.

The easiest way to see that concern is through the prism of markets: the Nasdaq Composite tanked 33% in 2022.

Former high-flying tech stocks such as Snap (SNAP) and Tesla (TSLA) finished the year off 80% and 65%, respectively. The cash cow, safe-haven stock that is Apple (AAPL) lost 27% last year.

Apple CEO Tim Cook presents the new iPhone 14 at an Apple event at their headquarters in Cupertino, California, U.S. September 7, 2022. REUTERS/Carlos Barria

Again, sentiment is awful right now.

And it should be until tech companies can prove themselves able to re-accelerate growth and turn more top-line revenue into bottom-line profit for investors.

But that’s the rub — tech stocks will continue to suck wind until the Federal Reserve signals a pivot on interest rate policy. And everyone knows it.

So the first part of your lesson is to proceed with caution on seemingly “cheap” tech stocks until we get that more dovish Fed.

The second part is you need to be ready to act before the Fed gives the all clear.

And if you think you’ve found a great thesis that pairs with a sharply discounted valuation, it may be worth nibbling.

One of those names could be Meta Platforms (META), as Mahaney suggests.

“I just think you’re going to have a major rerating in Meta’s stock,” Mahaney says.

The embattled social media company formerly known as Facebook enters 2023 with a near-trough valuation and the looming benefit of billions of dollars in cost cuts.

Those are cost cuts tech rivals such as Amazon (AMZN) and Google (GOOGL) still haven’t taken — making Meta’s stock “relatively” more attractive.

And if cost cuts aren’t exactly a thesis that gets you excited about tech stocks, you can thank Jay Powell for that. The ball is in his court.