(Bloomberg) — This year’s surge in technology stocks has been especially pronounced in the riskiest corners of the market, suggesting to some skeptics the potential for a swift reversal.Most Read from BloombergUnprofitable software developers, crypto firms, meme stocks, electric-vehicle makers and anything even tangentially related to artificial intelligence — they’ve all been on fire as the Nasdaq 100 Index has jumped 16%. The bull case is that financial conditions are much more welcoming now than they were in late 2022, with bond yields dropping from their recent highs as concern eases about inflation.The Nasdaq 100 fell 0.4% on Wednesday.A Goldman Sachs Group Inc. basket of unprofitable tech stocks is up 28%. EV maker Lucid Group Inc. is leading among Nasdaq 100 components with a surge of 69%. Among AI stocks, C3.ai Inc. and SoundHound AI Inc. have roughly doubled or more, while BuzzFeed Inc. has climbed 155% this year on a plan to use AI in content creation.In a measure of how investors have been gravitating toward risk, an analysis by Bank of America Corp. showed that the most shorted tenth of stocks in the S&P 500 has outperformed the least shorted by about 14 percentage points in 2023, while companies whose earnings missed estimates outperformed the S&P in the five days following the results, a trend the broker deemed perverse.Jim Smigiel, chief investment officer at SEI Investments Co., dubbed the action a “junk rally,” where the lowest-quality stocks do the best.“It really feels like we’re back in the meme times, but the difference in the macro backdrop couldn’t be any starker,” he said. “This is massive speculation, and it is going to burn itself out quickly because there are no fundamental drivers behind it.”Story continuesThis view is backed up by market positioning, as bearish bets on the Nasdaq 100 are building, according to Citigroup Inc.This year’s swings recall the retail-and-Reddit frenzy of the pandemic era, which spurred massive gains in troubled companies like AMC Entertainment Holdings Inc. — another of this year’s climbers, up 52%. However, that occurred at a time when the market was awash with stimulus and interest rates were at rock-bottom levels, bolstering valuations.The backdrop is much different now: Monetary conditions are much tighter, even if market interest rates have pulled back from their peaks, and economists are fretting about a potential recession ahead.Last week, the Federal Reserve lifted rates by a smaller degree than previous hikes, though Chair Jerome Powell said the central bank expects to deliver a few more increases before pausing its campaign to fight inflation. Some investors are betting the Fed will cut rates later this year, but if that proves to be premature, as last week’s red-hot payroll report suggested it could be, tech’s 2023 rally could be vulnerable.“We are in a narrow window where fears about inflation are subsiding but we haven’t yet given our attention to slowing growth,” said Irene Tunkel, chief strategist of US equity strategy at BCA Research. “Unprofitable and other risky companies are the prime candidates to rebound in this window, but this speculative exuberance is not a sustainable rebound.”At the same time, the fundamental picture has been soft. A number of bellwether stocks, including Microsoft Corp., Apple Inc., Amazon.com Inc., and Alphabet Inc., all reported results that were seen as mixed or weak. With more than half the components having reported, only about half the companies in the S&P 500 tech sector have beaten expectations in terms of revenue, down from 59% last quarter, according to data compiled by Bloomberg.“We’ve had a lot of disappointments on the top line, and we’re headed for an earnings recession that is only starting to play out,” Tunkel said. “Too many things have to go right for the rally to continue at this pace, and that’s offset by the probability that the gains will reverse and you’ll lose your capital.”Tech Chart of the DayMicrosoft shares rose 3% on Wednesday, a gain that resulted in the software company joining Apple as one of only two companies with a market value exceeding $2 trillion. Recent gains came after it unveiled a version of its Bing internet-search engine powered by the ChatGPT technology. The shares are up 15% this year, and it has a market cap of $2.06 trillion.Top Tech StoriesApple has expanded an internal test of its upcoming “buy now, pay later” service to the company’s thousands of retail employees, a sign the long-awaited feature is finally nearing a public release.Microsoft showed off plans to use new tools from startup OpenAI to improve its little-used internet search and browsing services, seeking to gain ground against market leader Google by being first to offer conversational responses powered by artificial intelligence.Connected TV should benefit from the likely shift in advertising trends epitomized by the pact between streaming platform Roku Inc. and food delivery service DoorDash Inc., ARK Investment Management Chief Executive Officer Cathie Wood said.EBay Inc. is cutting about 500 employees — or 4% of its workforce — as the e-commerce company continues to face slower consumer spending after a brief pandemic boom.Part 3 of Tesla Inc.’s so-called Master Plan about the “path to a fully sustainable energy future for Earth” will be presented on March 1, Chief Executive Officer Elon Musk wrote in a Twitter post Wednesday.Tencent Holdings Ltd. is planning to launch a Valorant esports league when the hit shooter title debuts in China this year, one of the strongest signs yet that the country’s internet giants are getting back to business after a two-year industry crackdown.Meituan shares sank the most in two months after the Chinese food delivery company unveiled plans to hire as many as 10,000 people this quarter in a bid to fend off a challenge from ByteDance Ltd.President Joe Biden called for antitrust legislation targeting technology giants, putting a spotlight on companies including Amazon, Apple, Meta Platforms Inc. and Alphabet’s Google.Zoom Video Communications Inc. is eliminating 15% of its workers as the service that became ubiquitous during the pandemic adapts to slower growth.Indonesian ride-hailing and delivery giant GoTo Group is sidelining several key executives and switching up its board, undertaking its biggest management reshuffle after a steep market selloff over the past year.–With assistance from Subrat Patnaik.(Updates to market open.)Most Read from Bloomberg Businessweek©2023 Bloomberg L.P.

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