The IT sector has been extremely volatile over the past 2022, taking the brunt of the swings in expectations over the Fed’s tightening policies and the outlook for the USD. When we take a look at the Nasdaq and the XLK (SPDR Tech fund), two of the most important benchmarks for the technology industry, we see that both are down significantly on the year, losing 27% and 23% respectively.
As a result of both markets’ recoveries off their YTD lows over the past few months, traders are wondering what the future holds for the technology sector as we move into the early first quarter of 2023. Will the rebound continue, or is there a chance that it will give way to a return of the bear trend? Let’s take a look at what’s driving the market and how these elements look set to develop moving forward so that we can evaluate the prospects for the technology industry in the first quarter of 2023.
Over the course of the past several months, market participants have developed a steadily increasing level of anticipation that the Federal Reserve will shift its stance on interest rates in response to the decelerating rate of inflation and the rising level of anxiety over the economy. The significant decline in inflation that occurred in October was a major contributor to the USD unwind that occurred going into the fourth quarter. This helped improve risk sentiment across the board, which propelled technology sentiment back into bullish territory.
Inflation decides all
Despite the fact that the short-term repercussions appear to be more negative than positive, there are certain optimistic viewpoints that should be taken into consideration in this context. The first reason is that it is now abundantly evident what the Fed intends to do in 2023. The inflation rate continues to receive a lot of attention, which brings some positive implications for the IT industry. The markets are anticipated to surge considerably higher as traders begin pricing in a speedier finish to the tightening cycle of the Federal Reserve if inflation continues to fall at the current pace or faster. Under these circumstances, the technology sector of US stocks should be the one to benefit the most, as investors are likely to shift capital away from blue-chip protective assets and towards more risky, higher-yielding companies in the technology sector.
The reopening of China is an important factor to keep an eye on.
One further thing to think about is the possibility that China will reopen in the first quarter. In the beginning of the fourth quarter, there was considerable conjecture based on a (possibly) stolen internal Chinese government letter that made reference to a March target date for the reopening of the Chinese economy. As a result of this, there was a significant amount of immediate upside in equity prices, particularly in the technology sector. Despite the fact that this report was swiftly discredited by Chinese authorities, subsequent occurrences have brought the China reopening story back into the public spotlight. For the first time since the pandemic took hold, the Chinese government has begun relaxing several of the restrictions placed on covids in response to recent protests that have taken place around the country. The trajectory of these moves is fueling suspicion that the government is indeed aiming towards a full reopening of the Chinese economy, and this assumption is being fueled by the trajectory of these actions. Given the significance of the Chinese market for the technology industry, such a reopening would be a significant boost for demand and ought to result in a big uptick in the price of technology stocks. Further optimistic support for technology equities comes from the uptick in global commerce, which should help move risk appetite back into encouraging territory.
Opportunities and threats to the technology sector
Given these considerations, the future of the tech stock market appears to be bright beginning in 2023. Although the initial disappointment caused by a more hawkish Fed perspective is a limiting factor for the time being, it does pave the door for significant higher swings in positioning if we see any challenge or change to this view going into next year (for example, significantly decreasing inflation). A confirmed reopening in China is likely to generate a substantial rise in positive momentum. In addition, any stories around China’s possible reopening should assist support technology stocks.
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