According to Michael Hartnett of Bank of America Corp., the rally in the largest U.S. technology stocks is at risk of fading further if the U.S. economy continues to slow.
The strategist, who is optimistic about bonds for the second half of 2024, has said Signs of an economic slowdown would trigger a rotation into stocks that have lagged expensive technology mega-caps this year.
In a commentary on Friday, Hartnett said current data suggested the global economy was “sick” and that “we are just one bad payroll away” from the stocks of major technology companies losing their dominance.
The uptrend in technology stocks such as Apple Inc., Amazon.com Inc., Alphabet Inc., Microsoft Corp., Nvidia Corp. and Meta Platforms Inc. stalled over the past two weeks as investors flocked to small caps on speculation that the Federal Reserve may soon begin cutting interest rates.
Since the Nasdaq 100 Index hit a record high on July 10, the market capitalization of companies in the technology-heavy index has fallen by around $2.6 trillion. This is also due to concerns that large investments in artificial intelligence may not pay off so quickly.
Still, BofA’s Hartnett said equity bulls held on to the belief that a correction was “healthy” because the market had not fallen below critical levels. The Nasdaq 100 has fallen about 9% since July 10, but is still up more than 30% from its October 2023 low. U.S. stock futures rose on Friday and are on track to recoup some losses.
The bank’s bull and bear indicator rose to 6.9 in the week ended July 24, its highest level in over three years. A reading above 8 would be a contrarian sell signal — which could be triggered if fund managers’ equity allocations rise and cash holdings continue to decline and a recovery by laggards leads to an improvement in market breadth, Hartnett said.