• It’s been a rough two weeks for tech stocks. S&P 500 Technology Index has fallen more than -10% from its peak, while major tech ETFs such as the Invesco Nasdaq Internet ETF and the Vaneck Semiconductor ETF plunged -7.1% and -15.9% respectively.
• With share prices of several tech companies trading close to their all-time highs, investors may be highly motivated to take profits at any sign of negative news.
• The recent selloff was most likely sentiment driven rather than a material deterioration in fundamentals. We reiterate our positive outlook for the tech sector and encourage long-term investors to make use of this opportunity to increase their position.
After making a strong start to the year, US tech stocks have taken a huge beating over the past two weeks. As of 25 July 2024, the S&P 500 Technology Index has fallen more than -10% from its peak, while major tech ETFs such as the Invesco Nasdaq Internet ETF (NASDAQ:PNQI) and the Vaneck Semiconductor ETF (NASDAQ:SMH) plunged -7.1% and -15.9% respectively. Despite the selloff, tech stocks are still sitting on gains of more than 22% on aggregate year-to-date (Figure 1).
Figure 1: Despite the recent selloff, US tech stocks are still up by 22% on aggregate this year
The rout was precipitated by sharp declines in the share prices of big tech companies, which together carry significant weight and have been responsible for the majority of the gains for most US tech ETFs this year. NVIDIA, one of the best performing constituents of the Magnificent 7 group of stocks, shed more than -16% of its value over the past two weeks. Meanwhile, Microsoft, Alphabet and Apple plunged by approximately -10% a piece over the same period.
The selloff over the past two weeks is likely to have been triggered by a mixture of reasons which ultimately led investors to question the sustainability of this rally.
In the semiconductor space, there were rumblings that US regulators were planning to implement tougher rules to further clamp down on chip exports to China. While such restrictions are already in place to a certain extent, the Biden administration is reportedly considering imposing more extreme measures such as the foreign direct product rule (FDPR), which would effectively restrict the export of semiconductor products that use even the tiniest amount of US technology to fabricate.
Sentiment surrounding chipmakers is visibly poor as even companies like TSMC and SK Hynix which just recently reported strong second quarter earnings were not spared from the selloff. The latter, which delivered record high quarterly revenues on the back of higher memory prices and strong demand for AI memory (including high bandwidth memory), saw its share price tumble close to -9% the day after results were announced.
Beyond the chipmaking industry, Alphabet also saw a post earnings selloff even as the company beat estimates on both the top and bottom line. Shares of Microsoft were hammered after the company suffered a major cloud service outage, piling on to the negative sentiment on tech stocks.
Selloff likely to be sentiment driven. Long-term growth story remains intact
Overall, we believe that the recent selloff is predominantly driven by negative sentiment, rather than any material deterioration in fundamentals. With share prices of several tech companies trading close to their all-time high prior to the selloff, investors may be highly motivated to take profits at any sign of negative news.
Even though some investors have expressed fears that the market might be headed towards another tech bubble driven by an overinvestment in AI, we think that such fears are overblown at this point in time. For one, the hyperscalers which have been investing heavily in AI have reported healthy demand for their services.
Alphabet for instance reported strong revenue growth in its search advertising and cloud units. In its latest earnings call, Alphabet’s CEO said that “AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues”. The company is also seeing great progress with AI Overviews, which is a tool that summarises search results for users. The management of TSMC, the largest producer of AI chips also said that demand for AI chips continues to outpace supply, a situation that is unlikely to normalise before 2026.
While valuations of tech stocks have gotten more expensive in recent times, they are still far from bubble territory. More importantly they are justifiable as tech companies continue to deliver impressive earnings growth that outpaces the broader market, a trend that is expected to persist as the world becomes increasingly digitalised (Figure 2).
Figure 2: US tech firms to deliver strong earnings growth in the years ahead
Don’t miss this golden opportunity to pick up more shares
Overall, we remain optimistic about the prospects of the tech sector. Besides the ability to deliver strong earnings growth (a key catalyst that should drive share prices higher), big tech stocks are arguably the most desirable group of companies to own in the current macroeconomic environment.
With inflation and interest rates likely to stay higher for longer, the focus on high quality companies, such as those with resilient earnings, strong balance sheets and competitive advantages cannot be understated. Big tech stocks check all these boxes. Long-term investors should consider making use of this opportunity to add to their position.
Table 1: Recommended products for US tech
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Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in the Vaneck Semiconductor ETF.
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