Tech stocks may pull out of their nosedive, but the sector won't return to its pandemic-era highs even when the Fed eases rate hikes

• Tech stocks won't stage a turnaround to the highs of 2021 even after the Fed slows or ends its rate hikes. 
• Experts say the bubble in the sector was inflated and ultimately popped by wider structural problems.  
• As liquidity dries up and investor enthusiasm wanes, the sector may just muddle through in 2023. 

Tech stocks may be able to pull out of their nosedive in 2023, but the sector won't get anywhere near the highs of recent years and will be hobbled by the drying up of liquidity and waning enthusiasm in the space, experts say. 

Even if the economy regains its footing and the Fed decides it's time to pull back on aggressive monetary policy in early 2023, there are other problems afoot for the tech sector.

While many tech titans have offered investors their apologies for the poor stock performance this year—citing Fed rate hikes, the rising cost of capital, and a strong US dollar as reasons why earnings have disappointed—there won't be a lot they can change in the new year to boost their fortunes. 

Tim Hayes, chief investment strategist at Ned Davis Research, told Insider he expects the Nasdaq to make a soft recovery after plunging 27% this year, but the sector is unlikely to reclaim its 2021 pedestal. He estimated the Nasdaq to rise 10%-15% next year, bringing the index around the 12,000 mark—still well below its all-time high at 16,000 just a year ago, when money was cheap and ample liquidity was sloshing through the market.

"I would not expect a return to over-speculation. Investor caution should be greater following all of the losses experienced due to tech exposure during the market decline," he said.

The success of tech could (and is needed to) lead a new bull market, but it's a mistake to assume tech will keep soaring to new heights, Hayes said, noting the success of tech stocks in previous years has fostered a sense of complacency in investors. 

"It just got increasingly overvalued and there's excessive complacency and optimism as these stocks continue to drive the market higher," he added. "It was almost more of an assumption: these stocks are just going to keep going up forever."

That fantasy was brutally upended in 2022, but it's a common phenomenon in growth stocks, and particularly in tech, which can drive excitement with new products that people don't yet fully understand, according Derek Horstmeyer, a corporate finance professor at George Mason University. He pointed to overexcitement and "valuations you can't possibly explain" in areas like crypto, which has suffered all year, most recently at the hands of the FTX debacle. 

Stagnating tech empires

The sort of blind enthusiasm that drove tech to dizzying heights during the pandemic has made the industry vulnerable to all kinds of headwinds.

Bill Maurer, an anthropologist and a technology and finance expert at UC Irvine, noted that speculation in the market may have caused complacency among tech firms themselves. While the pandemic's stay-at-home orders supercharged consumers' demand for tech, recent product releases haven't been very exciting. 

"There's a new iPhone, but what does it do? Not much different from the old one, right? So there's been a kind of creative stagnation in the industry, and of course a lot of big failures," Maurer said.

This is also evident in investors' disillusionment with once-lionized CEOs like Mark Zuckerberg, whose metaverse vision has been mercilessly mocked this year while his company's stock has plunged 65%. Even Elon Musk is feeling the heat as Tesla investors take a bearish view of his ability to steer a turnaround at Twitter while also managing the EV maker.

Tech stocks have been wounded partly from that waning enthusiasm, and the complacency in innovation needs to change in order for the industry to keep advancing and draw investors, according to Maurer.

That change could start with a leadership shuffle. Maurer noted that hardly any major tech company, barring Apple, has had a notable change in leadership recently. This means companies can be left vulnerable to the hubris of big tech billionaires and their pet projects. 

"Tech is still in this mode of like, charismatic big man, whose vicissitudes and whims overdetermine the business. That's got to change," Maurer said, adding that he thought a period of wild volatility was in store for tech stocks, rather than a retracement to previous highs. "There is a bit of a reality check taking place."