Company / Analytics

Analytics, 10 September 2020

Is the tech stock rally over?

In just three days the tech-heavy Nasdaq has lost more than 10%, having posted its fastest retreat from a high into a correction this week. Investors in the high-flying tech stocks may well be thinking: where do go from here? What comes next? Well, maybe backup or the rally might have gone too far too fast.

Tech stocks have rallied this year, especially since March when the Covid-19 pandemic led to a steep fall in global stocks. Tech stock nonetheless continued to rally, despite the US and the global economy is in shambles. Well, the rally was for the right reasons. After all, tech companies such as Amazon were filling the vacuum left by retail stores, and others such as Microsoft and Apple and Zoom were allowing people to work remotely while Netflix was keeping them entertained.

The June earning reports from these companies indicated to many investors as well as speculators that the tech segment was the way to go. And in they went, ignoring other sectors such as banks for the tech stocks.

At the same time, many were raising concerns that the tech-rally was going too far too fast. Their worries seem to be confirmed with the recent slowdown in tech stocks.

By far the largest sector tracked by the S&P 500, with an aggregate market capitalization of $7.66 trillion, information technology stocks make up more than 27% of the benchmark index. By contrast, health care—the second-largest sector—carries a market cap of just under $4 trillion and represents only 14% of the index.

Blue blue-chip tech stocks have performed the best of all, driving the S&P’s information technology sector up more than 25% year to date (compared to a 5% increase for the index at large), and 45% over the last 12 months (versus a 16% spike for the S&P 500).

On Tuesday, stocks on Wall Street fell for a third-straight session, led by another sharp sell-off in shares of the same giant tech companies that had led the market back into record territory last month.

The Nasdaq composite tumbled more than 4%, in the latest of a series of declines for technology stocks that began last week as investors abruptly began to recalibrate their appetite for the previously high-flying shares. The S&P 500 fell by about 2.8%.

Though the Nasdaq closed 2.7% higher on Wednesday, while the S&P 500 and Dow posted similar rebounds, up 2% and 1.6% respectively, one thing is clear, the recent pullback was a flashing warning sign: tech had gotten too overheated, too fast.

Valuations for some of the top names such as Apple, Amazon, Microsoft, Alphabet, and Tesla, had also become too extreme. For example, at its Friday low, Apple had lost more than $300bn in market capitalization in less than two days while Tesla had suffered heavy selling early on Friday, leading to being dropped by the S&P 500 which had initially hinted at adding Tesla to the Index.

What’s worrying the market and that has triggered the tech stock sell-off is the recent revelations that the rally in tech stocks was being engineered by SoftBank, a Japanese conglomerate that has a history of making outsize bets. According to revelations by the Financial Times, SoftBank had been a large buyer of options linked to the rising tech stocks, helping supercharge both the tech sector and the broader stock market, in August.

What comes next?

Investors haven’t really become disenchanted with tech stocks. For example, the Nasdaq latest correction means it has only shed about a months’ worth of gains, and the index is still up more than 60% from March.

There is no need to panic as the corrections reflect the reality that when things rise they are likely to come back down. Stocks will always rise and fall, and the current fall seems to have made things more affordable. For example, the gains on Wednesday were driven by “buy in the dip” investors who were taking advantage of the drop in tech stocks, especially on companies such as Apple, Tesla, and Microsoft.

Buyers seem to be jumping back to tech names, and as one analyst noted, historically, the returns for the Nasdaq following a rapid correction are mostly positive 6 to 12 months out.

Nonetheless, the argument that tech stocks have in recent months gotten far too expensive without the true fundamental growth to back them up is formidable.

Most tech stocks appear to be fairly valued, especially in the current environment where growth tech stocks such as Apple, Amazon, and Microsoft have been well-positioned to benefit from restrictions to control the spread of Covid-19.

The drop in tech stocks have indeed made them more affordable than they were weeks ago, and they are going to be even more attractive than they were a few days ago. The rally on tech stocks is likely to continue, especially as economic activity resumes in the coming months. However, though tech stocks appear to be recovering from their recent fall, it’s advisable not to jump back in too quickly. Monitor the market for a few days, like say two “up” swings following the sell-offs before rushing back in.

Choose one or several trading platforms and achieve your goals with Investors Europe

Investors Europe (Mauritius) Limited is authorised and regulated by the FSC Mauritius, license C112011088. Registered address: 3rd Floor Ebene House, Hotel Avenue,33 Cybercity, Ebene 72201, Republic of Mauritius. Registered Number: 113933.

Any information contained on this website is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here. Investing in certain instruments, including stocks, options, futures, foreign currencies, and bonds involve a high level of risk. Trading on margin comes with substantial risk as well. You must be aware of these risks before opening an account to trade. The income you may get from online investing may go down as well as up.