Wells Fargo Securities’ Chris Harvey doubles his warning of big tech, saying “reckoning” is ahead.
Given the risks associated with rising interest rates, he urges investors to take profits.
“The premium you’re paying is still exceptionally high,” the company’s head of equity strategy told CNBC’s “Trading Nation” on Friday. “We believe that the premium needs to be compressed. Second, we believe that the next 25 basis points over the 10-year [Treasury Note yield] is … above, not below. “
After rising at the beginning of the year, the 10-year yield is trending downwards. It ended the week at 1.43% on Friday, down nearly 17% over the past three months. The decline benefited growth stocks, especially big tech.
However, Harvey warns that a significant turnaround is practically inevitable and points to the fundamental economic backdrop. Rising interest rates will create the conditions for a double-digit retreat in momentum growth stocks. He predicts it could happen later this summer or early fall.
“The tech companies and the growth companies that sell at very high multiples,” he noted. “Even though they have high growth rates, the high multiples are what it will do.”
Harvey called the March rebound in Big Tech at the end of April a “head fake” at “Trading Nation”. He is sticking to the call and is now signaling more concern about stocks in rally mode.
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The tech-heavy Nasdaq closed at all-time highs on Friday. It closed at 14,639.33, up 121% from the Covid-19 low on March 23, 2020. The broader S&P 500 and Dow also closed at new record highs.
If the technology’s high-flyers are correct, Harvey expects the ramifications will affect the broader market due to the group’s dominance.
However, he maintains his bullish stance on market names associated with the economic recovery.
“They handled their profit expectations pretty well and were a lot more conservative than we thought,” said Harvey. “We believe this cycle is taking longer than many people expect and many people believe.”
His top cyclical picks include large money market banks, chemical and aerospace companies.
“Many of the cyclical companies are still in mid-single-digit to double-digit growth, relatively and absolutely,” added Harvey.
Harvey has an S&P 500 year-end price target of 3,850, down 12% from Friday’s closing price.
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