Calling a downside in the tech-sector meltdown hasn’t been easy even after the $5.5trn (€5.2trn) wipeout, yet there are some signs that are giving investors hope.
Rising interest rates, slowing economic growth and rising inflation have driven ECH shares down this year, a perfect storm of negative catalysts.
It has hurt everyone from retail investors, who loaded up on Kathy Wood’s Ark Investments exchange-traded funds last year, to the deep-pocketed asset managers who invested in Apple Inc.
Price charts paint a dire picture: The tech-heavy Nasdaq 100 index capped its seventh straight week of declines, the longest such streak since 2011, and shed nearly 30 pc from its peak last year.
The US trillion-dollar quartet of Apple, Microsoft Corp, Amazon.com Inc and Alphabet Inc have reduced the charge in the latest phase of this selloff.
Yet many investors are starting to see the light at the end of the tunnel. The Nasdaq 100 now trades for about 20 times its projected forward earnings — along with longer-term averages as the frothy valuations built up during the pandemic.
The Philadelphia Semiconductor Index, home to chipmakers including Intel Corp and ASML Holding NV, trades at about 15 times estimated earnings for the next 12 months, down from a peak of 24 hit in early 2021.
“It is hard to be patient when there is so much carnage. But the pain should be over soon,” said Jordan Stuart, client portfolio manager at Federated Hermes.
“We recommend that growth investors need to be prepared.”
Last week, Jefferies strategists turned bullish on the information-technology sector, saying in a note that a “dash for cash” by investors discounting extreme interest rate scenarios is reflected in the compression of market multiples.
Wells Fargo Securities said it is pausing its negative outlook in the name of growth as bearish sentiment reaches near-term peak.
Indeed, the number of companies trading above their 200-day moving average has reached rock-bottom levels, last seen in the first half of 2020, while Bank of America’s popular investor sentiment was described as “clearly contrarian buying”. area” is called.
For Kevin Mahan, who runs Henion and Walsh Asset Management, cash-rich Apple and Microsoft will recover losses over time because “most of the damage has been done” and some good opportunities are emerging in technology.
He is cautious on the timing of the rally, however, as the market has yet to show signs of capitulation. “I’m definitely not going down, and I’m sure there will be more sales bouts ahead,” he said.
Many investors are caught between prices that are now looking more attractive and the reality that the outlook for the global economy is highly uncertain.
“Markets are getting used to the fact that the driver that has driven this great investment environment for the past 10 years is not going to be any more,” said Maria Elena Lagomasino, CEO of WE Family Office.
In terms of market conditions, there has already been an exodus. A recent Bank of America survey showed that fund managers are “very low” tech, with allocations to the sector the lowest since August 2006.
The options market is also pointing towards a possible rally. At $157bn (€149bn) the Options Invesco QQQ Trust Series 1 ETF based on open contracts tracking the Nasdaq 100 Index show a put-to-call ratio that recently hit its lowest level in two years.
Outstanding calls hit the highest level since 2008. A drop in the put-call ratio is usually a bullish signal that investors are preparing for an upward move.
Support is also coming from abroad. The Chinese internet stock emerged as an unexpected bright spot in another turbulent week for tech, thanks to repeated pledges from Beijing to beat-down groups and interest rates on long-term loans.
This led the index of 81 Chinese stocks listed in the US to rise 4.7 per cent last week.
The Nasdaq Golden Dragon China Index, which has historically been positively correlated with the Nasdaq 100, is once again testing its 50-day moving average, a key technical hurdle that failed to rise steadily this year. has been
This timing may be different after the index outperformed the Nasdaq 100 last week, and the benchmark remains above its lows in March, which is a positive technical sign.
Of course, this is to be taken with a grain of salt given the recent disappointing economic data, weaker-than-expected earnings of Tencent Holdings Ltd and the persistence of China’s COVID Zero strategy.
Still, speculation is building of more economic stimulus from Beijing. (© Bloomberg)