Tech stocks are set for more pain as the Fed hikes interest rates harder than investors anticipate, JPMorgan strategist says

• Tech stocks are likely to stay under pressure as investors continue to shift to value, a JPMorgan strategist said.
• Hugh Gimber said interest rates will rise higher than the market thinks, putting upward pressure on bond yields.
• “You’re likely to see quite a different stock-market leadership to the one that’s been so familiar over the past decade,” he said.

Tech stocks are set to stay under pressure as the Federal Reserve raises interest rates much further than investors currently expect, according to a JPMorgan strategist.

Higher interest rates will further push up bond yields, and “equities will continue to take their cues from the bond market,” Hugh Gimber, global market strategist at JPMorgan Asset Management, told Insider.

The strategist said he’s optimistic about stocks overall, but said more economically sensitive sectors such as energy and finance will do better than growth-oriented sectors such as tech.

“You’re likely to see quite a different stock-market leadership to the one that’s been so familiar over the past decade,” Gimber said in a recent interview.

Stocks have dropped sharply in 2022 as bond yields have shot higher in anticipation of the Federal Reserve raising interest rates. Tech stocks have borne the brunt of the pain, as higher bond yields make their often far-off future earnings look less attractive.

Investors have pivoted to so-called value stocks such as banks, whose health is more closely tied to the economy. These were unloved during the pandemic, but now look set to benefit from higher interest rates, continued growth and inflation.

The Russell 1000 growth index has tumbled 8.83% so far this year, according to Bloomberg data, while the Russell 1000 value index has fallen just 1.47%. That compares to a drop in the benchmark S&P 500 of more than 5%.

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Traders expect a total of four Fed interest-rate hikes in 2022. Goldman Sachs said last week that markets are expecting the cycle to end in late 2023 or in early 2024, with rates at around 1.6%, although traders’ views are rapidly changing.

But Gimber said he expects the Fed to go much further than that over the coming years, as it realizes that the economy can withstand higher borrowing costs. He expects the “terminal,” or peak, rate to be somewhere around 2% or 2.5%, although he did not specify when it would be reached.

The realization among investors that rates are set to go higher than previously expected will add to the upward pressure on bond yields, Gimber said. That will encourage the “rotation” towards more economically-sensitive companies in stock markets.

He said that, over the next year, companies that can raise prices and which can produce strong results will fare best, as inflation is expected to stay high.

“Clearly within tech, there’s going to be a big divergence in the performance of the strong-earning tech names versus the more speculative parts of the tech sector,” he said.

“You think about the banks, you think energy, you think industrials, as those sectors that tend to be more resilient to higher yields,” Gimber said. “It’s the very growthy parts of the market that are seeing a much larger valuation drag.”