He said the valuations for the market and tech are high, but he does not have a problem with tech, which is benefiting from business spending. “We’re recommending stay with tech and health care. Our preference for the summer is health care over tech,” he said.
He said financials could do well in June because the Fed is raising interest rates Wednesday, a positive for bank earnings. Banks should also benefit since they are likely to be able to raise dividends after government stress tests.
Citigroup global strategists, however, did see some impact from Comey.
“It is possible that, with so little now priced in, the risk/reward for the medium term reflation/Trump trade may be favourable again. Or, at least, that negative sentiment regarding the Administration’s ability to deliver is waning,” they wrote.
Some of the stocks that investors had favored just after Trump was elected were being bought again, including small caps, which bounced Friday. As investors became disillusioned with Washington and lowered expectations for tax reform and stimulus, technology share valuations got richer because of their growth appeal.
Morgan Stanley equity strategist Michael Wilson said he believes the tech correction is overdue, given extremes in outperformance and positioning.
“Second, we don’t think it’s over and expect some follow through this week. Third, we would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing. Fourth, if we are going to reach our 2700 target for the S&P 500, large cyclical sectors are going to need to perform so we welcome Friday’s action as the beginning of better performance here which we have been expecting and writing about the past several weeks,” he wrote in a note.
He said the fact that the Nasdaq sold off 2 percent Friday but the broader S&P 500 was flat is a good sign that investors are repositioning, not dumping out of equities. “In our view, that is supportive of our view that this is a correction not the end of the bull market,” he wrote.
Goldman Sachs, however, is more skeptical and believes the conditions supporting the bull market, especially the highly valued technology stocks, are about to end.
“The unexpected mix of healthy growth and declining rates represents a Goldilocks scenario for U.S. equities,” wrote David Kostin, Goldman’s chief U.S. equity strategist, in a note. “However, just like in the fairy tale, this perfect scenario is unlikely to last.”
Goldman says that either better growth causes the Fed to hike more aggressively, a negative for stocks, or the low-interest-rate environment in the bond market is actually predicting a slower economy, also a negative for stocks.
Kostin is not expecting a big market crash, and he predicts the S&P 500 will be 4 percent lower from current levels — to 2,325 by the end of the year.
The firm is not telling clients to sell big-cap tech even with the sell-off, but points to positives in the banking group.
Watch: Tech’s healthy correction
