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Traders working at the New York Stock Exchange.
NYSE
Investors have dumped tech stocks Recently, but indicators make it look like the worst of the selloff is over.
The
Nasdaq Composite
has dropped about 8% since hitting a multi-month peak in mid August. Driving that has been a rising 10-year Treasury yield. That makes future profits less valuable—and many fast-growing tech companies are expecting a bulk of their profits to come far into the future. Pushing the yield higher has been rising short-term yields. Federal Reserve Chairman Jerome Powell made clear at the annual Jackson Hole economic symposium that the central bank intends to lift rates aggressively in order to combat inflation.
The good news: It looks like investors can only get more interested in tech from here. Last week, roughly a net $2 billion flowed out of technology stock funds, according to Bank of America. That’s the largest outflow since November 2021. Weekly outflows from tech, though, rarely exceeds $2 billion by much, in data going back to 2017. That indicates that, while there could still be more net outflows, those will likely lessen over the coming weeks and months.
That’s consistent with another positive indicator for tech. The 10-year Treasury yield, while up in recent weeks, is hitting a level that it has trouble surpassing. At about 3.1%, that’s up from its 2.57% low since the end of this June, but it’s still below a multiyear peak of 3.48% hit in mid June. And it has been unable to rise past its current level in the past few days.
The yield is also still above average annual-inflation expectations for the next 10 years. That means it has a positive “real yield,” so investors can make money even when factoring in expected inflation. With value to be found in the 10-year bond, it’s no surprise that buyers are stepping in to keep the price elevated—and the yield relatively subdued.
That means if investors can have confidence that the yield isn’t about to shoot to new heights, tech stocks can stabilize—and at some point a moving resume is higher. Even if the selling in tech continues in the near-term, it seems the selling isn’t likely to get much worse.
There is, however, one caveat. Many technology companies are seeing decelerating growth as they accrue more customers. That means that, over time, valuations—or the multiple the marketplaces on near-term earnings—could decline.
Cloud services is one example.
Salesforce
(ticker: CRM) analysts, for instance, expect the company to generate 17% sales growth for fiscal year 2023, according to FactSet. That would be down from growth of more than 23% in the past couple of years. Still, some of that slowdown seems reflected in the stock’s price. It’s now down 15% since a mid August peak of a recent rally, and the forward price-earnings multiple is down to 31 times from 36 times at the height of that rally. Morgan Stanley analyst Keith Weiss now deems the stock “a very attractive risk/reward.” He rates it at Overweight.
Sure, tech investors have a lot to sort out, but the worst may very well be over.
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