Will Tech Stocks Move Past the Correction?

Some strategists view the slump as a bump in the road

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The summer’s high-flying tech stocks have almost recovered from a correction that began in early September, and the relative speed of the rebound is one of several factors keeping some investment strategists optimistic about both the tech sector and the broader U.S. stock market.

“As has been the case so many times this year, demand resurfaced just when and where it was most needed,” Frank Cappelleri, desk strategist at Instinet, said in an email earlier this week. This helped limit the downturn to a correction—defined as at least a 10% decline from a recent peak—rather than a more serious bear market, he said.

Key Takeaways

  • The tech-heavy Nasdaq-100 Index has almost recovered from September’s correction.
  • Looking past predictions for the upcoming presidential election and volatile headlines, there are some positive underlying factors pointing to future gains in tech stocks and the broader U.S. market.  
  • Investors have begun favoring so-called “value” stocks, meaning the broader market may become less dependent on “growth” stocks alone.

After falling as much as 12.8% from an all-time high on Sept. 2, the Nasdaq-100 Index has proven that it can “absorb a big hit” and bounce back relatively quickly, according to Cappelleri. As of the close of trading Wednesday, this gauge of the tech sector—reflecting Apple, Google, and 98 of the other largest companies trading on the Nasdaq Stock Market exchange—was 3.5% below that high. Meanwhile, the S&P 500 Index, a more mainstream benchmark, narrowly escaped a similar correction and was 2.6% below its record high.

What do strategists find encouraging? For one, historical patterns: the Nasdaq-100 had several corrections leading up to the so-called “tech bubble” burst in the spring of 2000, indicating there may be more room left this time before a more enduring high is reached. More generally, market gains have been unusually broad-based in recent weeks, as measured by the sheer number of stocks on the rise. And then there’s the renewed interest in the less-flashy bargain stocks known as “value” stocks.

To be sure, predictions about the upcoming presidential election and on-again, off-again negotiations over another Congressional relief package add a layer of uncertainty to these underlying trends, tempering enthusiasm that the market is poised to go higher. What’s more, earnings season—when companies report their quarterly financial results—could cause more volatility, according to Cappelleri.

Tech Bubble Comparison

After the Sept. 2 peak, many market watchers drew comparisons between the 2020 gains in tech stocks and the tech bubble of the late 1990s and early 2000 that brought the entire market crashing. At their high, Facebook, Amazon, Apple, Microsoft, and Google’s parent, Alphabet—some of the market’s biggest tech companies—had risen an average of 91% since the market’s pandemic-triggered low in March

But corrections aren’t unusual for the Nasdaq-100, said Jurrien Timmer, director of global macro at Fidelity Investments. In fact, between October 1998 and the crash in the spring of 2000, the Nasdaq-100 experienced seven declines of between 10% and 15%, his data shows. 

“This is just a way to shake off the excessive sentiment,” Timmer said of the current correction. It’s actually “very healthy and very useful” for the market, he said.

Gains Obscured by Tech’s Declines

There also are positive signs of breadth in the overall market, or the number of stocks that are rising, Instinet’s Cappelleri said. According to his research, at least 90% of the S&P’s members rose in at least five of 10 recent trading sessions, a trend that “typically has bullish long-term implications,” he said.

Plus, less flashy sectors—like materials and industrials stocks—have outpaced gains for the broader market, signaling market sentiment isn’t all about how the Apples and Googles of the world are performing. Through Wednesday, the S&P 500 materials sector was up 72% and the industrials sector was up 66% from their respective March lows, compared with a 56% gain for the S&P 500 during that same period.

Value Stocks Take the Lead

Still another reason for optimism is a recent shift from so-called “growth” stocks to “value” stocks, said Sam Stovall, chief investment strategist of U.S. equity strategy at CFRA Research. This trend shows that “rotation hunters” may finally see a long-awaited and long-lasting shift that favors overlooked stocks—and means that the broader market’s gains are less dependent on growth stocks alone, he said.

The market’s mid-year rally was led by growth stocks—or companies (often in technology-related sectors) that are expected to grow at a faster rate than the overall market because of their relatively high price-to-earnings ratio

But since September, value stocks—those that may be underpriced by the market for the opposite reason—have outperformed growth stocks, helping the S&P 500 avoid the magnitude of the slump in the Nasdaq-100, and then bounce back faster, according to Stovall. Since Sept. 2, growth stocks in the S&P 500 are down 3.3%, compared with 1.5% for value stocks. 

Moving Past Correction Territory

What will it take to get the market over the hump? It may end up being even more momentum behind the less-flashy, non-tech stocks, according to Stovall and Cappelleri. Or it may take Congress passing another round of stimulus, Timmer said.  

That said, none of these market watchers foresee another bear market. 

The Nasdaq-100 “runs way hotter than the broader market,” Timmer said. “I view this as a bump in the road and once it settles down, the prevailing trend will continue.”

Article Sources

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  2. Yahoo Finance. "S&P 500." Accessed Oct. 15, 2020.

  3. S&P Dow Jones Indices. "S&P Industrials." Accessed Oct. 15, 2020.

  4. S&P Dow Jones Indices. "S&P 500 Materials." Accessed Oct. 15, 2020.

  5. S&P Dow Jones Indices. "S&P 500 Growth." Accessed Oct. 15, 2020.

  6. S&P Dow Jones Indices. "S&P 500 Value." Accessed Oct. 15, 2020.