The key to a sustained market recovery may lie in one of the weakest sectors this year: technology. As of Friday’s close, the Nasdaq Composite was 30% off its closing high of 16,057.44 on Nov. 19, 2021. It has sold off sharply since then as tech stocks have fallen amid runaway inflation and higher Federal Reserve interest rates. This combination has left investors less inclined to own names with exorbitant valuations and low earnings. The S&P 500, meanwhile, is down 15.5% this year, dragged down by the communications services and information technology sectors, as well as consumer discretionary. These areas represent approximately 44% of the entire index, based on their overall weighting. Both market benchmarks, however, show signs of year-end recovery potential. The Nasdaq is up 6% in the fourth quarter, while the S&P 500 jumped 12% over that period. But some investors believe that technology cooperation will be necessary for the market to rebound from this bear market. “In reality, the S&P won’t reach new highs without Apple, Amazon, Google, Tesla at least getting off the ground,” said Paul Schatz, founder and chairman of Heritage Capital. “I don’t think the rest of the top ten, where all the weights are, can carry them.” The Case for Tech Involvement Not all investors are convinced that the market needs tech stocks to rally, but the size and clout of these companies could prove a major obstacle to that thesis. Individually, Apple, Microsoft, and Amazon make up about 7%, 5%, and 3% of the S&P 500, respectively, based on their market caps. To put that into perspective, the weight of the energy sector is nearly equal to that of Microsoft, even after staging a massive rally this year. “Statistically, the market needs the participation of Apple, Microsoft, Alphabet, Tesla, mega-caps,” Joe Terranova of Virtus Investment Partners told CNBC’s “Closing Bell: Overtime” earlier this year. this month. “There has to be good behavior from these companies for there to be a broad-based rally.” The market can move sideways or edge up slightly without their help, but aggressively rising depends on their involvement and their investors, he said. Terranova said investors should “tactically leverage” stable names and pointed to companies it owns with strong balance sheets and lower beta exposure, including some semiconductor stocks such as Texas Instruments. Truist’s Keith Lerner agrees that the market needs the participation of technology to rally, although the benefits are likely to be limited even if they cooperate. He sees better opportunities in healthcare, energy and industrials – in particular, defense-focused names. Together, these areas represent approximately 29% of the index weighting. “[Tech stocks] have to participate, they have to move forward to get a big move in the market,” the company’s co-chief investment officer said. “But they don’t have to be a leader for the market.” Tech stocks that In this environment, CNBC Pro has been looking for stocks in the Nasdaq 100 — which is made up of the 100 largest composite stocks — that could pull the tech out of its rut. The names have buy ratings of at least 60% of analysts covering them and an average implied rise At least three-quarters of analysts say both stocks are a buy, despite the shares falling about 33% and 44%, respectively, this year. Consensus suggests Alphabet and Amazon could offer 28.9% and 45.5% hikes, respectively, with software makers Datadog, Atlassian, Zscaler and CrowdStrike — once high-flying names — making the cut. CrowdStrike could see the biggest upside from names in our scr een, potentially rallying around 64% from current levels. The stock is more than 52% off its all-time high. The software space has been under pressure this year, as has the broader technology sector. The iShares Expanded Tech-Software Sector ETF, which tracks the sector, has fallen 33% year-to-date. PayPal, Palo Alto Networks, Intuit and Chinese tech company Pinduoduo were also named. But, while the S&P 500 may require technical participation for a solid leg higher, other names can reach new heights without their cooperation, according to Schatz. He pointed to opportunities in financial services and healthcare, including names such as UnitedHealth, JPMorgan and BNY Mellon among potential moves. “Just because technology is breaking out doesn’t mean there aren’t other areas” that can work well, he said.
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