Investors are beginning to tiptoe back into U.S. tech stocks following a sharp decline, despite some still-elevated valuations that could penalize those hoping to buy the dip if markets falter again.
The Pullback and Its Impact
After a strong rally earlier this year, the tech-heavy Nasdaq 100 has fallen over 13% from its all-time high reached last month. This sell-off has been attributed to a range of factors, from U.S. economic concerns to the unwinding of global yen-funded carry trades.
The drop has made tech stocks more appealing to some investors, as their price-to-earnings ratios have decreased. For instance, the S&P 500 tech sector recently traded at 26.1 times expected 12-month earnings estimates, down from 31.3 in July—its highest level since 2002.
Valuation Concerns Remain
However, even with lower valuations, the tech sector still trades well above its 10-year average of 20.7. Its 32% premium over the broader S&P 500 is more than double its average over the past decade. These factors have made some investors cautious, especially with mixed earnings reports from major companies like Alphabet (GOOGL) and Microsoft (MSFT), and Warren Buffett’s Berkshire Hathaway (BRKa) reducing its Apple (AAPL) stake by half.
Selective Buying and Market Sentiment
Some investors are cautiously reentering the market. Robert Pavlik, senior portfolio manager at Dakota Wealth, has started buying select tech stocks after reducing positions in companies like Nvidia (NVDA), Broadcom (AVGO), and Amazon (AMZN) earlier in July.
Despite red flags, such as the tech sector reaching its highest price-to-earnings ratio in over two decades and the “Magnificent 7” trade being labeled the most crowded for 16 consecutive months, some investors see opportunity. Hedge funds, for example, engaged in their largest one-day buying spree in five months during the recent market sell-off, with most of the buying concentrated in the tech sector.
Future Outlook and Cautionary Stance
While the Nasdaq 100 remains up 6% and the S&P 500 up 9% for 2024, concerns about the future persist. Some megacap tech stocks are trading below their historical averages, while others remain elevated. The upcoming U.S. jobless claims and inflation data could further test market stability.
Some investors, like Michael Landsberg, chief investment officer of Landsberg Bennett Private Wealth Management, advise caution. He suggests using market rallies to sell portions of tech holdings and raise cash in preparation for potentially better entry points.