The turmoil in tech stocks is hurting for now, but may not lead to a wider correction

The Nasdaq Composite and the tech sectors of the S&P 500 fell sharply earlier in the year, but strategists say this may not be the fate of other groups or the broader market.

Tech-heavy Nasdaq sold hard early Monday, falling about 10% from its all-time high during its worst decline. Big cap tech like Apple, Microsoft and Alphabet were all significantly lower but capped their losses and helped Nasdaq initiate a dramatic reversal into positive territory towards the end of the day.

“I think it’s a violent and nasty re-rating, but I don’t think it’s going to derail the year,” said Lori Calvasina, head of US equity strategist at RBC. “I would say I’m still in the broader market decline category that is in the 5 to 10% range as opposed to 10 to 20%. 10 to 20% would be a growth fear, and I don’t think we are in a growth fear. “

With the decline in technology, value stocks and cyclical sectors have outperformed. Financial stocks, for example, are up 5% year-to-date thanks to rising interest rates, while S&P Tech stocks are down 4.6%.

The Nasdaq closed at 14,942.83 on Monday, up 0.05% from the session. The S&P 500 closed at 4,670.29 on Monday, less than 0.1%. The broad market index has fallen by 2% in the year to date.

“For Nasdaq, it’s a valuation re-evaluation,” said Calvasina. “This is largely a monetary reaction. This is not a growth fear. To really significantly and permanently knock the market down, investors really need to question whether the economy is threatened with a recession.”

The Nasdaq temporarily fell below its 200-day moving average on Monday, shocking investors. This level is the average of the last 200 session closings and is considered a key momentum threshold.

“I think a lot of this is technical,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “The Nasdaq hit its 200-day mark. That washed a lot of people out, and then it bottomed out. Buying at these important moving averages has worked in the past.”

But Boockvar said the sale wasn’t over yet. “We’re just getting started. The Fed is tightening. It is out of place to think that it will end in six trading days of the New Year,” he said.

The stock market has been rocked by a sharp rise in US Treasury bond yields since the beginning of the year. In the last hour of trading in 2021, the 10-year Treasury returned 1.51%. That benchmark return exceeded 1.8% on Monday afternoon, but then fell back to 1.76%. Tech stocks rebounded as yields fell.

Fixed income strategists expect the 10-year yield, moving against price, to continue trending toward 2% will hurt the economy badly.

“You are [investors] Baking in a more aggressive Fed, but they still say GDP is at 3.9%. That is way above average. When GDP is roughly at or below trend, you will see growth versus value. Now we have cyclical growth, you don’t have to buy long-term growth, “said Calvasina.

The highest rated tech and growth stocks are therefore disproportionately burdened by higher returns. Investors are willing to pay for technology and high-flyers to promise future growth. When the Fed takes cheap money away, these types of stocks look more expensive.

“Tech companies have nothing wrong with fundamentals and their earnings revisions are strong compared to other sectors. I don’t think this is the end of technology investments,” said Calvasina. The only thing wrong about these companies is their high ratings, she said.

The Fed released minutes of the December meeting last week that reiterated its goal to quickly cut its bond purchases and hike rates. The central bank also said it wants to reduce accommodation by shrinking its total assets from nearly $ 9 trillion.

“I feel like the market is getting exaggerated about its concerns about the Fed,” said Sam Stovall, CFRA Research’s chief investment strategist. “Will the Fed really throttle completely by March, raise interest rates in March and then reduce its balance sheet at the same time? I think the Fed will adjust and then keep its finger on the pulse “to see how the economy reacts to that adjustment.”

Stovall said there are many reasons why the market is not now selling out across the board. The Nasdaq could take further losses, but it is not anticipating a correction in the S&P 500. One reason is that funds are moving into retirement plans at this time of year and many investors have cash to invest in when prices are falling.

“It’s the expensive stocks that are likely to be harder hit. On a relative basis, I think Value will outperform not just now but this year at least until the third quarter due to the impending interest rate uncertainty, “said.

Stovall noted that the fourth quarter of 2022 and the first quarter of 2023 would historically be the best-performing quarters of the four-year presidential cycle. Meanwhile, the second and third quarters since World War II have seen average declines due to uncertainty about upcoming midterm elections.

Trivariate Research founder Adam Parker said the Nasdaq’s comeback on Monday was encouraging.

“I see this as an opportunity to become more optimistic and I am optimistic,” said Parker.

“I think there are individual stocks that will still go much deeper because they’re overvalued, whether it’s home workplaces that aren’t really having a technology shift or software companies that aren’t going to make real profits a long time, “said Parker.” It’s kind of junior to say that all of these things are worthless because prices are going up. These companies, which have been partially scaled back, you must now like more. “