Investors are looking past the US tech sector with an uncertain environment clouding the outlook

Investors are looking to the U.S. technology sector’s recovery this year for longer-term returns, as higher interest rates and an uncertain macroeconomic picture could create further headwinds, fund managers and strategists said.

The technology-heavy Nasdaq Composite has jumped 21% this year, more than doubling the S&P 500’s 9% gain, boosted by better-than-expected earnings and cost-cutting by major companies and expectations of a hiking cycle for the U.S. Federal Reserve. is nearing its end.

In the longer term, other sectors are likely to offer better returns at more attractive valuations, said Abigail Yoder, U.S. equity strategist at J.P. from Morgan Private Bank.

“The trend is that … a sector that leads in one cycle tends not to lead in the next cycle,” Yoder told the Reuters Global Markets Forum.

The Nasdaq’s current performance is a significant turnaround from a 33 percent drop in 2022, its worst year since the 2008 financial crisis, but risks from higher interest rates and a potential U.S. economic slowdown have not dissipated.

“We stay away from interest-sensitive sectors like technology,” said Jonathan Mondillo, abrdn’s North American head of fixed income.

Anticipating a slowdown in economic growth in the second half of the year, more cautious and selective investing across fixed income portfolios is a better option, said Jonathan Duensing, Amundi’s head of U.S. fixed income.

“We’ve always felt that the technology industry in general is one where you have to be very selective,” Duensing said.

Abrdn’s base case is a likely recession in the last quarter of 2023. Based on that, Mondillo favors credit in more defensive sectors, including healthcare and consumer staples, over technology.

Similarly, Yoder sees health care as an attractive defense in the face of a downturn, with mid-cap stocks likely to outperform their larger counterparts.

“Longer term, we prefer true mids, which are higher quality in nature and tend to show really good up/down capture over time,” he said.

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