MS Mike Wilson: The 20% tech stock rally has gone too far

“Technology is more supportive and coincidentally lower with the broader market in bear markets,” the strategist – who ranked No. 1 in last year’s institutional investor survey after correctly predicting the sell-off in stocks – wrote in a note. Christopher Goodney—Bloomberg via Getty Images

Morgan Stanley’s Michael Wilson – among the most prominent bullish voices on US stocks – warns that tech stocks’ rally of more than 20% is unsustainable and the sector will return to new lows.

The Nasdaq 100 surged into a bull market as investors shunned economic concerns such as banks following the collapse of several US lenders. Wilson says this rotation is happening in part because technology is seen as a traditional defensive sector, although he disagrees with that notion and sees utilities, capital and healthcare as having a better risk-reward profile.

“Technology is more supportive and coincidentally lower with the broader market in bear markets,” the strategist – who ranked No. 1 in last year’s institutional investor survey after correctly predicting the sell-off in stocks – wrote in a note.

“We recommend waiting for a sustained low in the broader market before adding to tech as the sector often has strong performance post-interpretation – a time when the cyclicality is working sideways,” he said.

What’s more, expectations that the Federal Reserve will soon end its monetary tightening will upset investors, Wilson said. “We do not view the recently expanded bank bailout program as a form of quantitative easing and ultimately a stimulus to risk assets,” he wrote.

JPMorgan Chase & Co., including Mislav Matejka. Strategists also said tech “may no longer be a good place to invest structurally.” The sector tends to underperform in a long-term context due to earnings risks, unattractive valuations and more expensive relatives, leaving strategists neutral.

After being a key driver of the S&P 500 index’s 3.5% gain in March, a decline in tech stocks could weigh on the market even as the banking crisis leads to a sharp deterioration in growth. Microsoft Corp., Apple Inc. and Nvidia Corp. were the biggest gainers in the benchmark last month, while banks were key laggards.