As quarters go, the first three months of 2023 have been ‘interesting’ to put it mildly.

Having been shunned at the end of last year due to worries over valuation and rising interest rates – which reduce the value of future free cash flows – technology stocks have roared back in 2023 with the US Nasdaq Composite index gaining almost 20% after its best March since 2010.

Strength in US tech has helped compensate for weakness in banks – the KBW Bank Index is down 20% this year – and has led to the first case in 20 years of the MSCI World Index going up despite a 10% drop in financials according to Graham Secker and the strategy team at Morgan Stanley (MS:NYSE).

Tech bulls like Dan Ives of US broker Wedbush argue the sector can continue to push higher on consumer demand (Ives believes Apple (AAPL:NASDAQ) will get back to a $3 trillion valuation or 20% more than its market value today).

Yet the quarter was an anomaly, driven by a weak US dollar, positive economic surprises (the data wasn’t as bad as feared) and stable earnings forecasts, which could be about to change
says Secker.

‘We expect markets to come under pressure as and when economic and earnings trends start to weaken. While this is not happening yet, history suggests that tighter credit conditions and lending standards will drag on both economic and profit growth going forward.’

Credit conditions had tightened considerably in both the US and Europe well before last month’s turbulence in the financial sector, and it’s far from clear US banks are out of the woods yet.

Unnerved by bank failures and in search of better returns, US depositors are pulling their savings out and piling into money-market funds, Treasury bonds and cash ETFs at the fastest rate since the pandemic.

In the first quarter, investors diverted over $500 billion of deposits into cash funds, with the trickle turning into a flood in the last fortnight, according to data from EPFR Global.

Banks have been slow to raise rates on savings but hiking them now would crush their profit margins and damage their share prices.

Yet the interest rate cycle isn’t over, and while central banks are concerned about financial stability they have a bigger priority which is fighting inflation.

Core inflation, which excludes volatile items such as food and energy, is running at 4.6% in the US and 5.7% in Europe – including food prices, which have proved much harder to rein in, the rate is much higher, meaning more rate rises are coming.

And the spike in oil prices after a surprise output cut by producers’ cartel OPEC at the beginning of April will only add to inflationary pressures.

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