The drubbing global technology stocks have seen this year may be far from over.
That’s the message from many strategists and fund managers, who expect this year’s rout to deepen in the near term as the Federal Reserve aggressively tightens monetary policy to fight inflation, raising the specter of a recession.
Even as a potential economic contraction looms, analysts are still predicting that earnings growth for tech companies will accelerate late this year and in 2023. Investors are overweight the sector in their portfolios and expect to profit by buying when prices dip, according to Bank of America Corp.’s quantitative strategists. Until that optimism fades, tech stocks won’t find a bottom, the firm says.
Last week’s swift rebound isn’t convincing the skeptics. The Nasdaq 100 Index gained 7.2%, snapping seven weeks of losses. Still, the tech-heavy benchmark is on pace to close in the red this month.
“While the rebound feels good it is not unusual to have bear market rallies,” said Peter Garnry, head of equity strategy at Saxo Bank. “Investors should not forget that the underlying commodity and supply chain dynamics will continue to underpin pressures on inflation and interest rates.”
Frothy technology shares have led the selloff in global markets on worries about higher rates curbing earnings growth. The tech-heavy Nasdaq 100 has lost $4.3 trillion in value from its November peak, entering a bear market. Alphabet Inc., Microsoft Corp. and Amazon.com Inc. have slumped 20% or more since the record.
“People used to buy the dip, but the weakness has gotten to the point where people are wondering whether tech should be avoided altogether,” said Robert Stimpson, co-chief investment officer at Oak Associates, which manages about $2 billion.
Lower valuations are encouraging some bargain hunters. The Nasdaq 100 is trading at 21 times projected profits over the next 12 months, down by about a third from its 2020 peak and below its five-year average of about 23. Alphabet sits at 17, down 40% from its high.
There’s “exceptional” long-term opportunity in tech stocks given the decline in multiples over the past six months, said Katie Koch, chief investment officer for public markets equity at Goldman Sachs Asset Management, said in an interview with Bloomberg TV last week.
Still, the average return potential for stocks on the Nasdaq 100 has dropped to 28% from more than 40% earlier this month, signaling a shift in sentiment as analysts slashed their 12-month price targets on individual companies.
To assess the current environment, Garnry suggests analyzing the meltdowns in the 1970s and the dotcom bubble.
“These drawdowns had multiple rebounds, periods of relief, before going lower again, so today’s investors must be extremely careful of not being fooled by a short-term rebound,” said.
Chip stocks just had a spectacular run. The Philadelphia Stock Exchange Semiconductor Index rose 8.1% last week, snapping two weeks of declines and posting the biggest gain in more than two months. The rebound was fueled by a rally in the broader market and robust results by some companies like Marvell Technology Inc.
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