Tech came back with a vengeance in the first quarter. Technology stocks surged to start the year, as the investing community flocked back into the beaten-up growth area on the heels of its worst year since 2008 . Despite a myriad of bank failures and looming recession fears, the tech-heavy Nasdaq Composite on Friday wrapped up its best quarter since 2020 , posting a 16.77% gain. Some investors say last year’s rout positioned the sector for a long overdue bounce, with the chaos that unraveled across the banking sector last month suggesting to some that the Federal Reserve’s punishing hiking cycle to lower-rate dependent growth stocks may be nearing its end. .IXIC YTD mountain Nasdaq posts best quarter since 2020 But despite tech’s stellar performance, rough waters linger with an uncertain macro picture, and questions loom over how much further these stocks can run. That’s left some investors questioning where to find bargains, or value, in the months ahead. “What you have in these stocks is a lot of expectation that the macroeconomic environment is not going to weaken, and that in my mind is a risky proposition,” Rosenblatt analyst Barton Crockett told CNBC’s ” Squawk on the Street ” on Monday. Given this setup, big investors say stock picking in the second quarter once again marks no easy feat, boiling down to betting on long-term names with growth drivers to weather another volatile period. Finding value in Big Tech Big technology stocks reigned as the first quarter’s biggest stars after the central bank’s hiking cycle dealt the sector the harsh reality check in 2022. After the worst year for tech since 2008 , many investors questioned whether the market could move higher in the new year. But these stalwarts proved many skeptics wrong. Apple , Microsoft and Amazon gained about 27%, 20% and 23% in the first quarter, respectively, as yields pushed lower. Investors flocked to these so-called safe havens to ride out the banking volatility given their rock-solid balance sheets, predictable earnings and dependable free cash flow growth. AAPL YTD mountain Apple shares so far in 2023 These behemoths also benefited from mounting hope for a pause in rate hikes, said Paul Meeks, a portfolio manager at Independent Solutions Wealth Management. Despite the runup in shares and a slowdown in their once seemingly limitless growth, investors like Advisors Capital Management portfolio manager JoAnne Feeney maintained or added to positions in mega-cap tech. Feeney, who owns most “FAANG” names in the portfolios she manages, cited their exposure to what she calls “multiyear growth drivers.” “We expected that when recession probabilities really got worrisome, there would be a run to tech,” she said. “Where are you going to get growth into a portfolio if you don’t own companies that have the potential to grow even through a cyclical recession?” The emergence of artificial intelligence served as another major catalyst for top tech names, as investors fought to capitalize on the technology viewed as life-changing as the internet. The frenzy kicked off in November with the launch of Microsoft- backed OpenAI’s ChatGPT, and fueled a competitive chatbot battle between the software giant and Alphabet . Amid this backdrop, Alphabet shares gained 17.6% in the first quarter as the company launched it’s Bard chatbot rival. Even with “all the hype” and jump in shares, Deepwater Asset Management’s Gene Munster said the AI opportunities are not fully reflected in the share price. Oakmark’s Mike Nicolas, a value investor who focuses on a longer time horizon, views Alphabet as an above average company with a healthy core business that’s trading below a market multiple on next year’s earnings per share estimates. When adjusting for the net cash on its balance sheet, and the value of its cloud computing business, investors are “paying a well below market multiple for the core advertising business,” he said. In his AI basket, Meeks also holds Microsoft as a long-term play. Feeney expects the company to benefit from an approaching bottom in the PC spending cycle, and potential uptick as customers age out of older products. Facebook parent Meta Platforms reigned as the biggest winner among the FAANG stocks in the first quarter, gaining more than 76% after a more than 64% slump in 2022. Despite the spike in shares, Munster views growing engagement, and an aggressive push to slash costs and improve margins, as reasons to buy the stock. META YTD mountain Meta Platforms surge in 2023 This year the social media giant made an aggressive push to trim costs, with CEO Mark Zuckerberg calling 2023 the ” year of efficiency ” during an earnings call. The move garnered praise from Wall Street, with the company following through on that pledge with a fresh round of layoffs in March after slashing 11,000 roles in November . While The Satori Fund’s Dan Niles expects the recent rally to fade , he told CNBC’s ” Squawk on the Street ” last month he began snatching up shares of Meta when they first tumbled in October. Betting on AI It’s no surprise that many investors banked on artificial intelligence stocks in the first quarter, and intend to continue betting on these stocks in the current quarter. Heavyweight competitors Microsoft and Alphabet stole center stage in the AI war, but chip stocks providing the parts to power these tool also benefited from the craze . Nvidia emerged on Wall Street as the dominant AI chip stock given its multiyear head start on graphics-processing units underpinning many generative AI models. Bernstein’s Stacy Rasgon said in a recent note that generative AI could create a market opportunity worth ” tens of billions ” of dollars for the sector. Nvidia has surged 90% following a 50.3% slump in 2022, while its valuation spiked to a forward price-to-earnings ratio of roughly 59 times. It’s a steep valuation — especially when staked against the S & P 500’s technology sector at a PE of 5.5 times — but multiyear structural growth drivers and larger-than-expected growth from AI tail winds justify that , Feeney said. NVDA YTD mountain Nvidia shares have gained more than 91% so far in 2023 “It’s wise to maybe take a little off the table when you get a surge like this, but you don’t want to lose exposure to Nvidia,” she said. Feeney also views Broadcom as an AI beneficiary with both exposure to growth through its data center business and defensive attributes through its dividend yield. On the AI front, Meeks holds Chinese technology stocks Baidu , which revealed its own ChatGPT rival last month, and should benefit from an economic reopening in China. Software, networking and cybersecurity galore Investors view software as another contender for investor cash in the quarter, in part due to rising AI spending and a drop in yields making growth valuations look more attractive. Last year the sector suffered as enterprises reallocated IT spending and trimmed costs in the face of a potential downturn. But some bright spots remain. Across the data networking space, Meeks picks Juniper Networks , Arista Networks and Ciena . Many of these companies, he said, built up backlogs during Covid-19 as supply constraints restricted parts they could sell to customers. Easing restrictions should drive sales for the next few quarters. Within cybersecurity, both Meeks and Feeney own Palo Alto Networks . Feeney likes the company’s sticky customer base. She also noted that the drive for AI capabilities will shift many companies toward the cloud, increasing the vulnerabilities they face while also heightening the need for cyber software. A turn to a cyberwar in Ukraine would also cushion the industry along with defense, she added. Within the software space, Nicolas highlighted Oracle and Fiserv , viewing both technology companies as transformative names trading below market value on next year’s earnings and situated to grow faster than the S & P 500 index. A potential retracement ahead? Not all investors view Big Tech so optimistically. Gilman Hill Asset Management’s Jenny Harrington told CNBC’s ” Pro Talks ” on Friday that she’s bracing for companies such as Apple and Amazon to plateau. “What leads you to the peak isn’t necessarily what gets you out of the trough,” Harrington said. “You need to reposition. I think this huge run back to tech was emotional and it wasn’t fundamental.” Many long-term investors expect a retracement, or fade, in the Nasdaq’s recent rally, viewing the robust quarterly gain as an anomaly unlikely to continue amid a backdrop of deteriorating fundamentals. SoFi’s Liz Young is in that cohort. She told CNBC’s ” Halftime Report ” on Monday that the rally likely only lasts a “few more days.” Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, also warned in a Monday note that the sector may not prove as safe as anticipated. “We advise waiting for a durable low in the broader market before adding to Tech more aggressively as the sector typically experiences a period of strong outperformance post trough — a time when its cyclicality works in its favor on the upside,” he said. Much of the surge in tech stocks stems from the oversold conditions created during 2022’s carnage, positioning many of these stocks for a bounce, Meeks said. But monster quarters like these are far from normal, and a potential give back is likely given the lack of changing fundamentals, he said. “The fact that the Nasdaq is up [16.77%] in one quarter on just green shoots and not more firm evidence has me a little bit worried,” Meeks said. “I think we could give some of it back.”
