Wedbush is bullish on tech stocks
In the closing months of the year, it is important to own the technology sector due to the Fed’s Jackson Hole summit behind us.
The Wall Street firm forecasts a 7% to 10% increase in the tech sector through the end of the year, with several companies, including Apple and DocuSign, outperforming. In 2021, the Technology Select Sector SPDR is up 23%.
Wedbush analyst Daniel Ives told clients, “We believe Fedspeak and messaging coming out of Jackson Hole is very bullish for tech stocks, with a ‘all clear for risk-on assets’ in the near term led by tech stocks.”
On Friday, investors breathed a sigh of relief after Federal Reserve Chair Jerome Powell signaled that bond tapering could begin this year, but the central bank is not in a rush to raise interest rates.
Powell stated that the Fed has “much ground to cover” in order to achieve its other goal of maximum employment, indicating that rate hikes would not occur immediately after the Fed ends its monthly stimulative bond purchases.
“In our opinion, the fear of a more hawkish Fed/Powell and rates rising sooner has been a lingering worry for the Street, threatening to put a halt to the ongoing tech and market rally,” Ives added. “Our bullish view of technology stocks over the years has been predicated on our multi-year thesis that the digital transformation story across the consumer and enterprise ecosystem is still in its early stages of playing out in what we characterize as a $2 trillion market opportunity for the next decade.”
Tech stocks have recently underperformed during periods when the 10-year Treasury yield has risen, on fears that higher rates will devalue the sector’s promised future earnings growth.
Check out Wedbush’s top technology stocks through the end of 2021. All of the listed names have an outperform rating from the Wall Street firm.
Wedbush anticipates that cloud and cybersecurity spending will skyrocket in the coming years.
“It is important to note that only 40% of workloads are currently on the cloud today and are expected to reach 70% by 2025, with cyber security threats growing by the day,” said Ives.
According to the analyst, increased spending in this sector should benefit stocks such as Zscaler, Sailpoint Technologies, CyberArk Software, Palo Alto Networks, and Fortinet. Zscaler has a $240 price target, CyberArk Software has a $185 price target, and Sailpoint Technologies has a $70 price target. Wedbush expects Palo Alto Networks and Fortinet to rise to $470 and $310, respectively, in the next year.
“We believe the fundamental drivers and sweet spot of cloud demand continue to give us high conviction in owning the long-term winners in the burgeoning cyber security sector, and we also expect a surge of M&A within this sector from both strategic and financial players,” Ives added.
Wedbush also sees some of the legacy technology darlings rallying through the end of the year and beyond. According to the company, the latest Industrial Revolution is taking place in the world of technology.
“The tech bull cycle, in our opinion, will continue its upward movement into year-end/2022 given the scarcity of growth names/winners in this market looking ahead on the heels of the 4th Industrial Revolution playing out among enterprises/consumers,” ives said.
This trend is expected to continue into the fall, with companies such as Apple, Microsoft, DocuSign, Nice, and Pegasystems benefiting.
Wedbush’s top pick in the technology sector is Apple. The Wall Street firm expects the stock to rise to $185 per share in the next 12 months.
Wedbush has a price target of $350 on Microsoft and a target of $310 on Nice. Pegasystems, according to the firm, will rise to $155 in the next year.
Morgan Stanley favourite stocks
Morgan Stanley equity strategist Mike Wilson has warned investors that a 10% or greater pullback is on the way, but he said in a note to clients on Monday that the shape and leadership of that correction is unknown. According to Morgan Stanley, the market is now in a “fire or ice” situation, as a mid-cycle rotation has all but played out.
This forecast calls for a barbell strategy, which entails being overweight on two distinct groups of stocks in order to hedge against market uncertainty. Wilson believes that the economy’s trajectory will determine who wins and who loses in the coming months.
“On the one hand, a continued strong economy and inflation could push the Fed to tighten policy, resulting in higher interest rates and lower equity valuations. “Here, you want to own cyclicals and avoid expensive long-term growth stocks,” according to the note. “In the alternative scenario, the payback in demand and weakening consumer confidence result in a materially softer growth outcome than the consensus currently anticipates. You want to own defensives here.”
Creating a barbell portfolio entails adding stocks in potentially profitable sectors while reducing exposure to sectors deemed more risky. In this case, Morgan Stanley is wary of high-growth tech stocks, which could be harmed by rising interest rates, as well as consumer discretionary stocks, which would suffer in the event of an economic slowdown.
“In the end, we still expect our mid-cycle transition to end with a 10%+ S&P 500 correction this fall, but the leadership will be determined by a narrative of fire or ice. As a result, our recommendation is a defensive-quality barbell with financials to participate in and protect in either scenario, which appears equally likely in our opinion.”
According to the firm, defensive quality stocks, which frequently include health care and consumer staples names, should perform well in a market downturn, while financial stocks should perform well if the economic expansion leads to higher interest rates.
Individual stocks on Morgan Stanley’s “fresh money buy” list include Synchrony Financial, food producer Mondelez International, and health insurer Humana.