By Louis Krauskopf
NEW YORK (Reuters) – Investors are cautiously moving back into U.S. technology stocks after a sharp decline, even as some high valuations threaten to punish dip buyers if markets tumble again.
After a sharp rally this year, the tech-heavy Nasdaq 100 has fallen more than 13% from its all-time high last month in a selloff blamed on everything from U.S. economic concerns to the unwinding of the global yen-funded carry trade.
The selloff has pushed down the cost of tech stocks based on price-to-earnings ratios, boosting their appeal to investors who had previously been reluctant to jump on board. The S&P 500 technology sector recently traded at 26.1 times 12-month earnings estimates. That compares with 31.3 in July, which was the highest since 2002, according to LSEG Datastream.
Still, bullish investors are cautious. While valuations have fallen, the tech sector is still trading well above its 10-year average of 20.7, and the 32% valuation premium over the broader S&P 500 is more than double what it was over the past decade.
Those valuations could leave the sector vulnerable to future turmoil. Other reasons traders are cautious include mixed earnings from some of the biggest names — including Alphabet, the parent company of Google, and Microsoft — and the sale of half of Apple Inc.’s stake by legendary investor Warren Buffett’s Berkshire Hathaway.
“I’m not going to put all my money in, but I’ve bought some stocks,” said Robert Pavlik, a portfolio manager at Dakota Wealth. Pavlik has been adding to tech stocks in recent days after cutting his stakes in companies such as Nvidia, Broadcom and Amazon.com Inc. in early July.
“I don’t think the outlook has changed for any of these companies,” he said.
Red flags abounded in giant-cap stocks last month: The technology sector hit its highest price-to-earnings ratio in more than two decades, while owning the “Magnificent 7” — a group of mega-cap stocks including Nvidia and Apple — was the most crowded trade for the 16th straight month, according to a survey of fund managers by Bank of America Global Research.
When markets fell in early August, big tech and growth stocks were among the hardest hit. Since the Nasdaq 100’s peak in July, Nvidia shares have fallen about 27%, Amazon shares have fallen about 18.5% and Alphabet shares have fallen about 17%.
Some investors haven’t wasted much time investing. Global hedge funds made their biggest one-day buying spree in five months on Monday, amid a selloff that sent the S&P 500 down about 4.25%, Goldman Sachs said in a note to clients earlier this week. Much of the buying was in the technology sector, with semiconductors among the most popular, according to the bank, which tracks hedge fund buying by its clients.
Despite recent declines, the Nasdaq 100 is still up 6% in 2024, while the S&P 500 is up 9%. Optimists can point to strong financial performance: With most companies already reporting, two sectors with large market caps—technology and communications services—are on track to boost second-quarter earnings by 19% and nearly 28%, respectively, from a year ago.
“There are stocks that we like and we think earnings will hold up and valuations have improved. When you get that recipe, it’s worth putting some money in them,” said Chuck Carlson, CEO of Horizon Investment Services.
Carlson said his company is considering whether to buy more shares of chipmakers Broadcom and Qualcomm after the recent decline.
Individually, some large-cap companies are trading below historical price-to-earnings averages, while others remain elevated. For example, Facebook’s parent company Meta Platforms is trading at 21.7 times, below its 10-year average of 25 times, while Microsoft is trading at 30 times, above its 10-year average of 25 times.
While economic concerns have been a component of the recent sell-off, investors may gravitate toward large-cap technology stocks if those concerns persist, said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.
The “bulletproof” balance sheets of mega-cap companies and their ability to grow earnings even in tough economic times have made them the “new defensive safe havens” for many investors, Melson said.
To be sure, while markets have stabilized over the past two sessions, it remains unclear whether the recent bout of volatility is over. The uncertainty surrounding the economic outlook will be tested in the coming days, with weekly U.S. jobless claims due on Thursday and monthly CPI inflation data due on August 14. As a result, some investors believe there are better opportunities to buy technology stocks ahead.
“We encourage investors to take advantage of market rallies to sell a portion of their holdings in the technology and industrial sectors to raise cash and prepare for bumpy roads and potentially better entry points,” Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, said in a written comment.
(Reporting by Louis Krauskopf in New York; Editing by Ira Iosbashvili and Matthew Lewis)