The Nasdaq Composite is on track to suffer its worst two-session clobbering since September, raising questions about what has sparked a sudden selloff in tech, which has been at the heart of Wall Street’s bull run in equities in recent months.
The selloff began on Friday, where Apple Inc.
2016’s best stock performer in the S&P 500 index
on a percentage basis, and a clutch of Silicon Valley darlings or so-called market disrupters like Amazon.com Inc., got yanked abruptly lower and have continued their unraveling on Monday.
The index was down more than 1%, for a combined 2.96% decline in the past two sessions, which would mark its worst two-day skid since Sept. 9, 2016 when it fell 2.99%, according to WSJ Market Data Group.
See also: Apple’s stock set to snap longest streak above key chart level in over 6 years
What has sparked the so-called tech wreck isn’t exactly clear, but there are a few theories that have come under consideration, as investors try to determine if the current retreat is a short-term correction—defined as a pullback in an asset from a recent peak of 10% or more—or something more ominous for the group of highfliers (notably so-called FAANG stocks, like Facebook Inc.
Apple Inc., Netflix Inc.
and Google-parent Alphabet Inc.
), that appear to be coming back to Earth. The chart below compares tech’s five giants with the S&P 500’s year-to-date performance:
Some market participants argue that the tech cohort has come too far, too fast and is due for a sharp downturn after what has been a monster rally. The Nasdaq Composite
has climbed more than 15% so far this year, as has a popular way to bet on tech names, the Technology Select Sector SPDR
driven in large part those so-called FAANG names. The Dow Jones Industrial Average
, meanwhile, has posted a gain of 7.3% while the S&P 500 is up 8.3%.
Check out: As internet stocks hit records, familiar questions about bubbles arise
Goldman Sachs in a June 9 research note titled “Is FANG mispriced? written by the bank’s analysts Robert D. Boroujerdi, Jessica Binder Graham, and John Marshall implied that Wall Street’s love affair with the sector had led to a herd mentality, or fear of missing out (or “FOMO”), that may be coming to an end soon.
Here’s what Goldman’s strategist wrote, including Microsoft Inc.
among the tech giants on a tear.
FAAMG, as well as Tech more broadly, is increasingly correlated with both. Growth and Momentum. While this phenomenon may persist given portfolio managers’ “FOMO,” passive carry and the lack of any pro-cyclical policy wins or movement in risk assets (e.g. 10-year) mean reversion risk is increasing.
One measure of valuation, price to earnings or P/E ratio, shows that some of those names are trading well above the average for S&P 500 stocks.
Amazon has a P/E ratio of 182 times, Netflix has a P/E of 201 and Google carries a P/E is trading at 32 times, compared with the S&P 500 index which has average P/E of 22, according to FactSet data.
Some surmise that the recent move is a so-called sector rotation, or move out of one area that has gotten pricey into another area that might provide more opportunities for better returns. This sort of move might suggest that the tech selloff isn’t signaling a coming death spiral but instead a healthy move of investors, consolidating recent gains from one area of the market and putting it to work in another.
Read: Does tech selloff mean that value, a decadelong loser, is ready to supplant growth strategies?
Some, notably Canaccord Genuity analyst Tony Dwyer, make the case that investors were set to make bets on so-called “Trump trades,” or those areas that would most benefit from President Donald Trump’s pro-growth promises of deregulation, tax cuts and infrastructure spending.
Some speculate that the down turn is a bad omen. MarketWatcch columnist Howard Gold writes:
This may be only a correction, and the FAANGs may scale even greater heights. But their collapse would pose the biggest challenge to the eight-year-old bull market since oil prices hit bottom in February 2016. New leaders would have to emerge to limit this to a normal sector rotation, not a full-fledged bear like the one that followed the dot.com meltdown of 2000.
Overall, two bad trading sessions doesn’t a trend make. And a number of analysts say even a retreat in tech may set up for further gains ahead rather than auguring protracted heartache ahead in Silicon Valley.
Also read: The surprise tech stocks that are bucking the selloff
Here’s what analysts at Morgan Stanley
had to say in a Monday research note led by strategist Michael Wilson, equity strategist.
|First of all, we think this was way overdue given the extreme outperformance and positioning in technology shares. Second, we don’t think it’s over and expect some follow through this week. Third, we would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing. Fourth, if we are going to reach our 2700 target for the S&P500, large cyclical sectors are going to need to perform so we welcome Friday’s action as the beginning of better performance here which we have been expecting and writing about the past several weeks. Finally, the fact that the Nasdaq could sell off 2 percent but leave the broader S&P 500 essentially flat is a good sign that money is not leaving equities, but simply repositioning. In our view, that is supportive of our view that this is a correction not the end of the bull market.|
Kathleen Brooks, research director at City Index, in a Monday note to clients, also was sanguine about tech’s recent slide:
We believe that the latter could be correct, as nothing fundamental appeared to spark this sell off. Instead, the selling pressure appeared to be triggered by a report from Goldman Sachs that pointed out the enormous boost to the market capitalisation of tech stocks this year, some $600bn, which may be stretched. Apple dropped nearly 4% on Friday, and was under continued pressure early in the US session on Monday, along with other Silicon Valley giants.
Read: MarketWatch’s snapshot of the market
Also read: Now that FAANG stocks are crashing, which are undervalued?