Surging tech stocks are entering bubble territory and could see a pullback soon, JPMorgan's top strategist says

• The AI-fueled rally in tech stocks has entered bubble territory, JPMorgan's top strategist said.
• Marko Kolanovic noted it's unusual that tech stocks are surging when interest rates are rising.

Technology stocks have rallied so strongly this year that they're entering bubble territory, putting them at risk of a pullback once the hype and speculation in markets fades, JPMorgan's top strategist says.

Marko Kolanovic said Wednesday in a CNBC interview that the recent surge in tech shares is "too exceptional." He argued the breadth of the 2023 rally has been too narrow, with Big Tech companies powering the benchmark indices' gains this year.

"It's hard to say that it cannot go more, but we think it's in a little bit of a bubble domain already," Kolanovic said, adding stocks could see a pullback.

The rebound in tech stocks so far this year partly reflects hype around artificial intelligence following the blockbuster debut of OpenAI's ChatGPT. Investors have bid up the stock prices of Nvidia, Microsoft, and other tech companies, as they wager they'll be major winners from the AI revolution.

Kolanovic, however, said he's not so bullish given the rise in tech stocks has come at a time when the Federal Reserve has hiked interest rates at the fastest pace in history. That disconnect is atypical and a warning sign, he said.

"Technology went up in parallel with interest rates. So interest rates move higher and tech moves higher which typically doesn't happen. That also is a little bit of a worrisome signal," Kolanovic said.

"AI is not a new thing," the bank's chief global markets strategist said, adding that there's no certainty how the technology is going to play out.

Kolanovic said his team aren't so positive on tech stocks as they're concerned about interest-rate shocks. Higher rates tend to lower valuation multiples on growth stocks, as investors are willing to pay less of a premium for them when they can earn solid returns from bonds and savings accounts. They also worry greater borrowing costs and an economic downturn or recession will slow the companies' progress.

The Fed has raised its benchmark rate from nearly zero to upwards of 5% since early 2022 in a bid to cool historically high US inflation. Investors are gearing up for the central bank's June policy meeting, and waiting to see whether the Fed will pause its tightening after the recent banking-system stress.