Bank America says this corner of the bond market is a top play for 2024
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Tech stocks may have been the play for 2023, but for next year Bank of America Securities likes their debt. The bank called investment-grade corporate bonds of technology companies one of its top 10 trades for 2024. “Own tech balance sheets, but not tech EPS in ’24,” investment strategist Michael Hartnett wrote in a Nov. 19 note. The “Magnificent 7” tech stocks — Apple , Alphabet , Amazon , Microsoft , Meta Platforms , Nvidia and Tesla — led the market higher this year. Nvidia, for instance, has skyrocketed a staggering 229% year to date, while Meta is up 190% so far this year. The tech-heavy Nasdaq has gained 39% year to date. Hartnett said his call on the bonds of big U.S. tech companies is a “great, underappreciated contrarian hedge” in a year that will likely see rate cuts from the Federal Reserve and either a “hard landing” or “soft landing” for the economy. “How do you position for unexpected events next year? A decent hedge would be the bonds of companies that have a lot of cash,” he added. “The Magnificent 7 have a lot of cash.” That unexpected event would be a hard landing, according to Harnett. He says the consensus view is a soft landing, or a gradual easing of inflation and the labor market in response to the Fed’s rate hikes. But Harnett expects there is a greater risk than expected that economy will slow down abruptly. If a hard landing is underpriced by investors, then this outcome unquestionably will be negative for equities, Harnett explained. With the biggest positions in equities in the Magnificent 7, a hard landing would lead to deleveraging of those stocks, he added. It would also be positive for bonds. “You would get some rotation into high quality corporate bonds — and there is nothing more high quality in the corporate bond market than large-cap U.S. tech,” Hartnett said. Overall, he expects money to flow into bonds next year. Buying investment-grade tech corporate bonds is just one side of the firm’s barbell strategy in the asset class, he explained. “You certainly want exposure to what we would call the diamonds in the rough — the best house in the worst neighborhood, like banks,” Hartnett said. — CNBC’s Michael Bloom contributed reporting.
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