Declaring the bottom of the tech sector’s meltdown isn’t easy, even after a $5.5 trillion wipeout, but there are some signs that give investors hope.
ech stocks have been under pressure this year as rising interest rates, slowing economic growth and rising inflation create a perfect storm of negative catalysts.
That has hurt everyone from small investors who loaded up Cathie Wood’s Ark Investment exchange-traded funds last year to deep-pocketed money managers who invested in Apple Inc.
The price charts paint a bleak picture: the tech-heavy Nasdaq 100 index just ended its seventh consecutive week of declines, the longest such streak since 2011, and is down nearly 30 percent from its peak last year.
The US trillion dollar quartet of Apple, Microsoft Corp, Amazon.com Inc and Alphabet Inc have led the charges down in the latest phase of this sell-off.
But a number of investors are beginning to see light at the end of the tunnel. The Nasdaq 100 is now trading at about 20 times its estimated future earnings — in line with long-term averages — as inflated valuations built up during the pandemic recede.
The Philadelphia Semiconductor Index, home to chipmakers like Intel Corp and ASML Holding NV, is trading at about 15 times expected earnings for the next 12 months, well below a peak of 24 hit in early 2021.
“It’s hard to be patient when there’s been so much carnage. But the pain should end, possibly soon,” said Jordan Stuart, client portfolio manager at Federated Hermes.
“Our recommendation is that growth investors need to be ready.”
Last week, Jefferies strategists voiced bullishness on the information technology sector, saying in a note that a “capital spurt” from investors pricing in extreme interest rate scenarios “has been more than reflected in the compression of market multiples.”
Wells Fargo Securities said it is pausing its negative view on growth stocks as bearish sentiment has reached a near-term extreme.
In fact, the number of companies trading above their 200-day moving average has hit a low last seen in the first half of 2020, while Bank of America’s popular gauge of investor sentiment fell in the so-called “clear contrarian buying area”.
For Kevin Mahn, who runs Hennion & Walsh Asset Management, Apple and Microsoft’s cash and cash equivalents will erase their losses over time as “most of the damage is done” and some good tech opportunities are created.
However, he is cautious about the timing of a recovery as the market has not yet shown any signs of capitulation. “I’m certainly not going to call a bottom and I’m sure there will be more bouts of selling,” he said.
Many investors are torn between prices that now appear more attractive and the fact that the outlook for the global economy remains highly uncertain.
“Markets are adjusting to the fact that the very engine that has propelled this fantastic investment environment for the past 10 years will no longer be there,” said Maria Elena Lagomasino, Chief Executive Officer of WE Family Offices.
There has already been an exodus in terms of market positioning. A recent Bank of America survey found that fund managers are “very short” in technology, with allocation to the sector at its lowest level since August 2006.
The options market is also pointing to a possible rally. Options on the $157 billion (€149 billion) Invesco QQQ Trust Series 1 ETF, which tracks the Nasdaq 100 Index, has a put-to-call ratio based on open contracts and recently its lowest in two years reached.
Outstanding calls have risen to their highest level since 2008. A drop in the put-call ratio is usually a bullish sign that investors are preparing for an upside move.
There is also support from abroad. Chinese internet stocks provided an unexpected bright spot in another turbulent week for tech, thanks to repeated pledges from Beijing to shore up the struggling group and a cut in interest rates on long-term loans.
This contributed to a 4.7 percent gain in an index of 81 US-listed Chinese stocks last week.
The Nasdaq Golden Dragon China Index, which has historically been positively correlated with the Nasdaq 100, is retesting its 50-day moving average, a key technical hurdle it has failed to consistently clear this year.
This time could be different after the index outperformed the Nasdaq 100 last week and the benchmark stayed above its March low, a positive technical signal.
Of course, this should be taken with caution given recent disappointing economic data, weaker-than-expected earnings from Tencent Holdings Ltd and the persistence of China’s Covid-Zero strategy.
However, speculation about further economic stimulus from Beijing is increasing. (©Bloomberg)
https://www.independent.ie/business/technology/after-a-55trn-wipe-out-have-technology-stocks-finally-hit-rock-bottom-41676918.html Have Tech Stocks Finally Bottomed After Losing $5.5 Trillion?