Wells Fargo: Tech stocks are vulnerable to rates uncertainty, sees more volatility

Wells Fargo strategists voiced a cautionary outlook for the technology sector, stressing that technology-related equities are particularly vulnerable to uncertainties in long-term interest rates and ongoing inflation variability.

As markets navigate through a period of heightened volatility, Wells Fargo’s analysis highlights several potential triggers for increased market turbulence in the months ahead.

"There are a number of potential issues that could spark financial-market volatility in the months ahead," strategists noted. Among these, he identifies the timing of potential Federal Reserve interest-rate cuts as a key factor. The next Federal Open Market Committee (FOMC) decision on June 12 will be closely watched, as it includes policymakers' latest interest-rate projections.

"The Fed’s March projections showed three expected rate cuts this year, but the latest fed funds futures contracts now price in one or at most two rate cuts, with the highest probability coming at the December meeting," they explained.

"We continue to expect two cuts this year and only one cut in 2025,” Wells Fargo’s team continued.

The Fed has made it clear that it needs convincing evidence of cooling inflation and labor-market data before cutting rates. However, strategists pointed out that recent data shows only tentative signs of such a trend.

"April inflation data out in May showed continued falling inflation in goods prices, but services inflation remains a problem," strategists noted. Moreover, while payroll and wage growth are moderating, they have not yet eased sufficiently to give policymakers confidence in reducing rates.

"This Friday’s monthly labor report looms as a key data point before the Fed gathers," they remarked.

Wells Fargo said its guidance underlines the importance of rebalancing equity portfolios, with a particular focus on tech stocks.

"We believe tech-related equities are vulnerable to uncertainties in long-term rates while inflation remains variable," strategists wrote.

“We also prefer a focus on quality. In equities, we still like the U.S. over international, U.S. large caps over mid and small caps, and sectors with cheaper-than-tech valuations and long-term growth potential like Industrials, Materials, Energy, and Health Care,” they added.

“Equity downside, should we see it, can offer opportunities. Be ready. Have a plan. Buckle (NYSE:BKE) up.”