After a precipitous decline, investors are cautiously buying back into US tech stock shares, even if some still-high values could penalize dip buyers should the markets falter once more.
The highly volatile Nasdaq 100 is down over thirteen percent from its all-time high reached just one month ago in a sell-off that can be attributed to anything from worldwide yen-funded carry trade unwinding to concerns about the U.S. economy. This is after this year’s scorching run.
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Due to the sell-off, tech stocks now have lower price-to-earnings ratios, which appeals to investors who were previously hesitant to buy them. The S&P 500 technology sector was recently trading at a multiple of 26.1 times projected 12-month earnings. In contrast, LSEG Datastream reports that in July, it reached a high of 31.3, the highest since 2002.
Even still, optimistic investors are being cautious. Tech stocks are still trading far above their 10-year average of 20.7, despite a slight decline in prices. More than twice as much as it has in the past ten years separates it from the S&P 500 at this 32% valuation premium.
These values may leave the industry open to more volatility in the future. Other reasons traders are being cautious include mixed results from some of the largest names, such as Microsoft (NASDAQ: MSFT) and Google parent Alphabet (NASDAQ: GOOGL), as well as the sale of half of Berkshire Hathaway’s (NYSE:BRKa) holding in Apple (NASDAQ: AAPL) by renowned investor Warren Buffett.
Robert Pavlik, senior investment advisor at Dakota Wealth, stated, “I’m not going all in, but I’ve performed some buying.” After selling interests in businesses such as Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), and Amazon.com (NASDAQ: AMZN) at the beginning of July, he has begun to add to several tech investments in recent days. “I don’t believe that any of these companies’ outlooks have changed,” he stated.
The technology sector saw its highest-ever price-to-earnings ratio in over two decades last month, and owning the “Magnificent 7″—a collection of massive stocks that includes Apple and Nvidia—was judged the most overflowing trade for the sixteenth consecutive month, according to a survey of fund managers conducted by BofA Global Research. These are just a few of the warning signs for megacap stocks.
Large tech and expansion stocks suffered the most when markets collapsed at the start of August. In the months since the July top of the Nasdaq 100, Nvidia has fallen about 27%, Amazon has fallen 18.5%, and Alphabet has fallen roughly 17%.
A few investors were quick to jump in. In the middle of a sell-off that saw the S&P 500 drop by as many as 4.25%, global hedge funds embarked on their biggest one-day purchasing binge in more than five months late Monday, according to a note from Goldman Sachs to clients previously this week. According to the bank, which monitors the purchases of its hedge-fund clients, the majority of the purchases were focused in the technology sector, with semiconductors being among the most popular industries.
The S&P 500 has risen 9% in 2024, whereas the Nasdaq 100 is still up 6% despite the most recent declines. The computer and communication services sectors, which include several megacaps, are expected to have increases in second-quarter earnings of 19% and roughly 28%, respectively, compared to a year ago. Bulls can refer to these sectors’ good financial performance.
“We have certain stocks that we like because we believe the earnings will continue to grow and the market has become more valued,” stated Chuck Carlson, CEO of Horizon Investment Services. “When you get those recipe, it’s worth investing some money again in to them.”
After the recent decline, Carlson stated that his company is debating whether to purchase additional shares of chipmakers Qualcomm (NASDAQ: QCOM) and Broadcom (NASDAQ: BCM).
Compared to historical averages, the price-to-earnings ratios of some megacap companies are currently below those of others. For instance, Meta Platforms (NASDAQ: META), the company that owns Facebook, is selling at a discount to its 10-year average of 25, trading at 21.7 times, while Microsoft is at a premium, trading at 30 times.
According to Garrett Melson, investment analyst at Natixis Investing Managers Solutions, investors may flock towards megacap technology companies if economic uncertainties continue, even if they have been a factor in the recent sell-off.
Many investors view the megacap corporations as “the new, protective safe havens” because of their “bullet-proof” balance sheets along with their capacity to grow earnings even during challenging economic times, according to Melson.
Although the markets have steadied during the last two days, it is still unclear whether the current wave of volatility is ending. In the next days, the weekly the US jobless claims data on Thursday along with the monthly index of consumer inflation data on August 14 will test the level of uncertainty around the economic environment. Consequently, some investors think that in the future, there might be more chances to purchase tech stocks.
Chief investment commander of Landsberg Bennett Secret Wealth Management Michael Landsberg stated in a written commentary, “We encourage buyers to use market rallies to sell part of their assets in the tech and manufacturing industries to raise cash along with get ready for difficult paths and better feasible entry points.”
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