‘Right now is not the time to be a hero’: Top investing minds at $1.4 trillion T. Rowe Price warn that there’s serious recession risk in 2024 — but these 4 tech stocks will still dominate

• Wall Street is mostly bullish on the US economy in 2024, but T. Rowe Price isn’t so sure.
• Interest rates may not fall next year like many in markets are currently counting on.
• Here’s why the firm is still optimistic about tech stocks despite concerns over the economy.

Several large investment firms are discounting a US recession in 2024 as growth remains strong and inflation continues to fall, but T. Rowe Price believes that optimism is misplaced.

Goldman Sachs, Citi, and UBS Global Wealth Management strategists predict that the economy will expand further next year. In a November 16 webinar, Goldman Economy Chief Jan Hatzius reiterated that the 15% chance of a 2024 downturn is no more than a normal year.

While T. Rowe Price does not have an official economic forecast, the firm’s top executives urged investors to be cautious at a mid-November conference.

“We’re stuck in the middle,” said Tim Murray, a capital markets strategist in T. Rowe Price’s multi-asset division, of his risk-taking strategy in this environment.

“It leaves us in this situation where I’m constantly talking to clients, and they want us to say something with really high conviction and take a really aggressive stance, and you just can’t do it,” Murray continued. Now is not the time to be a hero because resolution is not on the horizon.”

‘Too soon to declare victory’

Twelve months ago, few economists or investors thought the US would avoid a recession.

“Going into this year, we had a slowing economy; we had the Fed on one of the most aggressive hiking cycles it’s ever done,” Murray said. “If ever there’s been a recipe for recession, that’s it. But yet, we have not had a recession.”

Central banks spent nearly two years trying to slow rampant inflation by raising interest rates, and their efforts appear to be paying off. Prices in the US rose less than expected in October, and bulls think that progress will encourage the Federal Reserve to finally ditch rate hikes.

However, T. Rowe Price is skeptical that the Fed will end its fight against inflation anytime soon. The firm believes rates will remain higher for longer — even if the labor market starts to suffer.

“We’ve had significant progress on inflation, but it is too soon to declare victory,” Blerina Uruci, the chief US economist for T. Rowe Price’s fixed income division, said at the conference. “We need to see services continue to come down at the same time as slack in the labor market materializes further.”

The job market looks healthy enough to take more monetary tightening, Uruci said. Although net hires are down in recent months, she noted that they’re only back to pre-pandemic levels. Uruci also pointed out that the labor market is still tight, as illustrated by stable quit rates, which suggest that workers are confident that they can find new jobs.

Murray said manufacturing data and corporate earnings forecasts suggest that the greatest risks to the economy have already passed. However, he’s not ruling out a reversal until the Fed signals that it’s ready to cut interest rates.

“The great thing about a soft landing isn’t so much the soft landing, it’s that it’s followed by a recovery,” Murray said. “And that recovery is still very much in doubt until the Fed cuts, until inflation starts to fade enough that we can get the Fed to cut and give us the all clear on that.”

4 tech stocks to own during the AI boom

Even though T. Rowe Price expects interest rates to rise again in 2024, it isn’t abandoning growth stocks, given that technology companies dominated this year’s high-rate regime.

In 2023, a group of mega-cap tech stocks known as the “Magnificent 7” carried the market. According to T. Rowe Price, those stocks rose 53.2% through October, compared to a 1.2% year-to-date return for the other 493 companies in the S&P 500.

Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla trade at a significant valuation premium to their peers, but Murray believes it is justified.

“The expectation is, when you see these really elevated valuations, everyone thinks, ‘Boy, these stocks must be set up for failure; they have such high valuations,'” Murray stated. “But the reality is, the outlier valuations that these seven stocks carry is absolutely matched by the fundamentals.”

Murray believes those market leaders are worth owning in a balanced portfolio that includes real assets such as commodities and real estate as long as they can continue to execute by growing earnings.

“My point on the Magnificent 7 is, you can’t ignore them,” he said. “You can’t just say, ‘Hey, let’s ditch the Magnificent Seven — they’re way too expensive.'” As always, you must take a multifaceted approach.”

T. Rowe Price portfolio manager of global technology equity strategy Dom Rizzo agreed that the Magnificent 7’s momentum will not stop just because the group is expensive.

“Perhaps the most important question: Are today’s technology valuations reasonable?” “I think we’re in the range of reasonableness,” Rizzo said, comparing the current situation to the internet boom of 1998 rather than the dot-com bubble bust of 2000.

“One, they have ROEs that are much higher than the rest of the world,” Rizzo later added. But, more importantly, I believe AI is a sustaining innovation, which means that their ROEs will remain at or expand from here, because these are the companies best positioned for artificial intelligence and this incredible revolution.”

Rizzo believes Nvidia (NVDA) stands out among the stocks in that septet because of its dominant position in the rapidly growing artificial intelligence space, on which he is extremely bullish.

“Artificial intelligence has the potential to be the biggest productivity enhancer for the global economy since electricity,” he said. “This is an incredibly big deal, and I think it’s going to change the world.”

Some investors have warned that artificial intelligence is overhyped or in a bubble, but Rizzo dismissed those claims. He cited estimates that the total addressable market for AI chips will grow at a compound annual growth rate of 50% from 2023 to 2027, while the AI software market will grow at an 18% annual rate from 2021 to 2026, reaching $800 billion.

Nvidia, the top-performing stock in the S&P 500 this year, dominates the AI chip industry and commands massive gross margins due to its lack of competition.

As a result, Rizzo believes that hyperscalers in need of AI chips are looking for an alternative, and that Santa Clara-based AMD (AMD) fits the bill. He’s impressed with its MI300 graphics card, which has been in high demand since its release in early 2023.

Whether Nvidia, AMD, or another competitor wins the AI chip wars, Taiwan Semiconductor Manufacturing Company (TSM) and Netherlands-based capital equipment firm ASML Holdings (ASML) should be winners, according to Rizzo. These two companies’ shares are up 33.7% and 25.6% this year, respectively, and may continue to rise in 2024.