Tech Companies Still Recovering from a Low-Rate Era, Says Bank of America
The tech sector is still experiencing the effects of a low-rate era, according to Bank of America’s technology, media, and telecommunications team. The firm stated that the unwinding effects of the “zero interest rate policy” era are ongoing and will continue into 2024.
In a Sunday note, the TMT team highlighted that earnings were not a near-term priority at many companies, as valuations in Growth Tech were dictated by EV/Sales, total revenue growth, and revenue growth accretion, rather than earnings accretion. “As a result, companies were incentivized to pursue low/no margin revenues, creating many distortions,” the report stated. It added that this trend created over-confident management teams and investors, with software, internet, e-commerce, and streaming companies being the most impacted.
Furthermore, Morgan Stanley predicts slowing growth and easing policy in 2024, stating that the U.S. will see GDP growth slow down next year. The firm also forecasts that the Federal Reserve will hold rates steady at 5.375% until June 2024, when it predicts rate cuts will begin.
Chief U.S. economist Ellen Zentner emphasized that high rates for longer will cause a persistent drag on growth, more than offsetting the fiscal impulse and bringing growth sustainably below potential from 3Q24. The firm maintains its view that the Fed will achieve a soft landing, but weakening growth will keep recession fears alive.
Additionally, U.S. stock futures opened slightly lower Sunday night. Futures tied to the Dow Jones Industrial Average fell by 43 points, or 0.15%, while S&P 500 and Nasdaq 100 futures declined by 0.16% and 0.12%, respectively.