Investors enamored of tech stocks that suddenly seem only to fall are searching for answers. The simplest may be that the group just isn’t that special anymore.
Another earnings season is here and again the whole US stock market feels like it’s at risk of being laid low by tremors originating in the technology sector. Ten days into October and the Nasdaq 100 Index— home of Facebook, Apple, Netflix and Alphabet—has posted a decline that would eclipse any full-month loss during the bull market.
Volatility that has simmered for months in markets as far away as China is rising up to shake American companies, too. On Wednesday alone, the US tech index had its worst sell-off since 2011, plunging 4.4%.
A dozen explanations exist for the rout, which has sent Amazon Inc., Netflix and Nvidia Corp. down 10% or more since 1 October. Treasury yields are up, a trade war with China is raging, and the Federal Reserve is raising rates. Another explanation is tied to the earnings that computer and software companies are about to report.
In short, what had been amazing growth is in the process of turning ordinary. Not bad, by any rational measure—but unexceptional. Firms in the S&P 500 Information Technology index will probably say profits climbed by 19% in the third quarter—the first time since 2014 that they rise less than the broader market—before the rate eases to half that over two years.
“The hurdle rate for success specifically in technology is unusually high," Satya Pradhuman, founder of Cirrus Research LLC, said on Bloomberg Television. “We get a combination of high expectation of leadership stocks and a legitimate softening in top line growth," he said. “As the profit cycle peaks, the investment community will focus more on earnings visibility."
In and of itself, it’s absurd to stress about 19% earnings growth, more than twice the average pace of the last 100 years. The issue today is a relative one—both to the rest of the market and the past. These days, a lot of industries are seeing profits climb close to 20% . But they trade nowhere near tech’s current valuation.
Another way of looking at it is that computer and software companies are having their best streak of profitability since the internet bubble. And people are aware of how that ended.
The S&P 500 fell for the fifth day Wednesday, the longest streak since Donald Trump’s election. All of 11 main sectors were lower, with tech stocks the worst. The Nasdaq 100 Index lagged behind the broader market for the seventh day in nine. Globally, technology companies have lost $900 billion in market value since their peak in late August.
An exchange-traded fund tracking the Nasdaq 100 fell another 0.7% after the 4 pm close of New York trading.
Sure, energy and industrial giants including Boeing and Chevron weighed on sentiment, but an outsize focus rests with tech considering its importance to the bull market. Since bottoming out in 2009, the S&P 500 has gained more than 300 percent. Four of the five top contributors? Apple, Microsoft, Amazon.com and Alphabet, accounting for nearly a fifth of the run-up.
Before this month’s rout, tech shares had been a clear leader in the market. Even with the recent exit of high flyers such as Facebook and Alphabet, the gauge tracking tech shares doubled in the past three years, almost twice the gain of the S&P 500 and the next best performing group.
The concept of peak earnings isn’t new. Investors have been fretting the possibility since Caterpillar Inc.’s “high water mark" comment earlier this year. But the idea that technology companies may not shine as usual has the group losing its luster as earnings season nears.
“The FANG stocks have big valuations that are baked in, and they need to justify with continued positive earnings surprises, which investors have been questioning recently," said Alex Bellefleur, chief economist and strategist at Mackenzie Financial Corp. “So you have stocks at high multiples, you have a rally in yields that increases the discount rate at which you discount those future earnings, and you question the level of growth that is baked in. It can hurt a lot and be difficult. "
Of course, many of the companies hit hardest in this selloff aren’t renown for their bottom lines. Netflix and Amazon, which trade at more than 100 times forward earnings, both tumbled more than 5% on Wednesday.
Anyone looking beyond the US markets has been aware the seeds of a sell-off were sprouting elsewhere. Chinese stocks have been marching lower for months led by some of the nation’s biggest technology companies. Alibaba has fallen 20% since the start of September, while Tencent Holdings slipped 16%.
Other areas of technology have been flashing warning signs. Semiconductor stocks have struggled to keep pace with the broader market. The Philadelphia Semiconductor Index, a group of 30 semiconductor related companies, has fallen 13% since closing at a record in March.
“The biggest concern within tech is going to be the semiconductor stocks because you had Micron come out already and cut guidance, they mentioned tariffs, and clearly trade has weighed on that industry overall," Lindsey Bell, an investment strategist at CFRA, said by phone. “That’ll be one of the black-eyes of the group."
Amidst the doom and gloom, a case can be made that what’s happening is completely normal for the high-flying group. The sector was in for a breather, especially as rates rise and investors reassess ownership of higher multiple stocks. After all, the Nasdaq 100 is still up more than 10% this year and almost 50% since the start of 2017. The S&P 500 technology and consumer discretionary sectors, home of part of the FAANG cohort, are two of the three best performing areas this year.
For Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, a mini tech wreck presents a great buying opportunity for investors. Amazon’s share price may be lower, but that doesn’t mean their business is slowing, he said.
“I have a hard time thinking that tech earnings are going to slow dramatically," Bradshaw said by phone. “What we’re seeing is a normal market correction, and tech is falling more than any other sector because it rose more than anything else. The economy is strong, consumers are strong, the demand for technology is strong."
This story has been published from a wire agency feed without modifications to the text.