Tech stocks are set to hold onto their 'all-star' status in the 2nd half of this year for 4 reasons, Wall Street strategist says

• Tech stocks were the "clear first half MVP" after rising nearly 40%, Raymond James said.
• The firm said the fast-growing sector is poised to remain its "all-star" status in the second half of the year.
• These are the four reasons why investors should keep betting on tech stocks, according to Raymond James. 

After the Nasdaq 100's near-40% rally in the first half of the year, some investors are questioning whether now is the time to take profits and rotate into other areas of the market, or double down on the sector.

The surge in recent months was sparked by a massive earnings guidance boost from Nvidia, as the chipmaker benefits from the increased adoption of AI technologies. With the second-quarter reporting season kicking off later this week, investors' will be trying to gauge how durable the earnings growth will be for tech companies.

According to a Friday note from Raymond James chief investment officer Larry Adam, the growth should persist and tech stocks should retain their "all-star" status after taking the "MVP" title in the first half of the year.

"The performance by the Tech sector to-date was one for the record books. The sector posted its best first half of a year on record and is outpacing the S&P 500 by the widest margin over a six-month basis since 1999," Adam said.

These are the four reasons why Raymond James expects technology stocks to retain their "all-star" status in the second half of 2023.

1. Not as expensive as it appears

The technology sector is about 1% below its all-time high set in December 2021. Since then, its earnings have increased by about 5%, meaning its valuation has improved despite the near record highs for tech stocks. And the sector has a history of exceeding estimates.

"While the sector trades at a 42% premium to the S&P 500 on a next 12-month basis — the highest of any sector — it has beaten its earnings estimates by the largest amount in aggregate over the last 10 years, making it less expensive than current estimates suggest," Adam said.

2. High-margin businesses

The sharp stock market sell-off in 2022 recalibrated tech executives' focus away from growth and towards profits. That has led to a focus on efficiencies and significant cost cutting over the past few months, all in an effort to maintain or improve margins.

"This effort has paid off, as tech maintains the strongest margins (24%) of any sector and far outpaces the S&P 500 (12%). As we enter a period where returns will be more challenging as we likely enter a mild recession in the fourth quarter of 2023, an emphasis on maintaining the bottom line will be a key focus for investors (something that tech companies have proven capable of doing)," he said. 

3. Tech dominates investment

The recent wave of generative artificial intelligence highlights the fact that more and more companies are directing their spending to technology companies. More than 200 companies mentioned "AI" on their first-quarter earnings calls, Adam highlighted, adding that a recent industry survey suggested that about 65% of companies are planning to invest in AI.

"Already, tech spending accounts for ~62% of total corporate fixed investment (up from 35% in 2000). A continuation or acceleration of this trend will continue to support tech earnings," he said.

4. Diversification

Technology companies have grown more diversified since the dot-com bubble, and that should add to the resilience of the sector.

"For mega-cap tech, less than 50% of revenues come from tech-related products. Rather, the bulk of their earnings are more service oriented and derived from the consumer discretionary, communication services, financials and health care spaces," Adam said.