Technology stocks

After a $5.5 trillion wipeout, have tech stocks finally bottomed out?

Calling the bottom of the tech sector’s meltdown isn’t easy, even after a $5.5 billion (5.2 billion euro) wipeout, but some signals are giving investors hope.

These stocks have been hammered this year as rising interest rates, slowing economic growth and soaring inflation form a perfect storm of negative catalysts.

It hurt everyone from retail investors who invested in Cathie Wood’s Ark Investment exchange-traded funds last year to deep-pocketed asset managers who invested in Apple Inc.

Price charts paint a dire picture: The tech-heavy Nasdaq 100 index has just completed its seventh straight week of declines, the longest such streak since 2011, and is down nearly 30% from at its peak last year.

The trillion-dollar US quartet of Apple, Microsoft Corp, Amazon.com Inc and Alphabet Inc led the charge lower in the latest leg of this massive sell-off.

Still, a number of investors are beginning to see the light at the end of the tunnel. The Nasdaq 100 is now trading at around 20 times its estimated forward earnings – in line with long-term averages – as the frothy valuations accumulated during the pandemic retreat.

The Philadelphia Semiconductor Index, home to chipmakers such as Intel Corp and ASML Holding NV, is trading at around 15 times expected earnings for the next 12 months, well below a peak of 24 affected in early 2021.

“It’s hard to be patient when there’s been so much carnage. But the pain should end, maybe soon,” said Jordan Stuart, client portfolio manager at Federated Hermes.

“Our recommendation is that growth investors need to be prepared.”

Jefferies strategists turned bullish on the information technology sector last week, saying in a note that a “spot run” by investors discounting extreme interest rate scenarios “has been more than reflected in the compression of market multiples”.

Wells Fargo Securities said it was suspending its negative view on growth stocks since bearish sentiment hit a near-term extreme.

Indeed, the number of companies trading above their 200-day moving average hit all-time lows in the first part of 2020, while Bank of America’s popular measure of investor sentiment is in what it calls “unambiguous contrarian buying territory”.

For Kevin Mahn, who heads Hennion & Walsh Asset Management, cash-rich Apple and Microsoft will recoup their losses over time as “most of the damage is done” and good opportunities arise in technology.

He remains cautious about the timing of a rebound, however, as the market has yet to show signs of capitulation. “I’m definitely not going to call a bottom, and I’m sure there will be more selling episodes to come,” he said.

Many investors are torn between prices that now look more attractive and the fact that the outlook for the global economy remains highly uncertain.

“Markets are getting used to the fact that the very engine that has driven this fantastic investment environment for the past 10 years will no longer be there,” said Maria Elena Lagomasino, managing director of WE Family Offices.

In terms of market positioning, there has already been an exodus. A recent survey by Bank of America showed fund managers are “very short” tech, with allocation to the sector at its lowest since August 2006.

The options market is also pointing to a potential recovery. Options on the $157 billion (€149 billion) Invesco QQQ Trust Series 1 ETF that tracks the Nasdaq 100 index show a put-to-call ratio based on open contracts that recently bottomed In two years.

Open calls have reached their highest level since 2008. A drop in the put-to-call ratio is usually a bullish sign that investors are preparing for a rise.

There is also support from abroad. Chinese internet stocks emerged as an unexpected bright spot in another turbulent week for tech, thanks to Beijing’s repeated pledges to back the battered group and an interest rate cut on long-term loans.

That helped fuel a 4.7% rise in an index of 81 Chinese stocks listed in the United States last week.

The Nasdaq Golden Dragon China Index, which has always been positively correlated with the Nasdaq 100, is retesting its 50-day moving average, a key technical hurdle it has consistently failed to overcome this year.

This time may be different after the index outperformed the Nasdaq 100 last week, and the benchmark remained above its March low, a positive technical signal.

Of course, this should be taken with a grain of salt given recent disappointing economic data, weaker than expected earnings from Tencent Holdings Ltd and the persistence of China’s Covid Zero strategy.

Still, speculation about other economic stimulus measures from Beijing is building. (©Bloomberg)