Assessing the damage after tech's worst selloff since 2022

What happened

On Wednesday, equity markets saw a broad-based selloff, led by technology stocks. The S&P 500’s decline of 2.3% was the worst selloff since December 2022 and the first 2% down day since February 2023. The S&P 500 technology sector declined over 4% and is down about 9% since its peak earlier this month.

The impetus for the decline appeared to be underwhelming earnings reports, including two of the “Magnificent 7” stocks – Tesla and Alphabet – which slid 12% and 5%, respectively. The de-risking in tech bled to other areas of the market such as small cap stocks, which also pulled back more than 2%, following a sharp runup over recent weeks.               

Our take

This choppier market action of late, which we have been anticipating, likely has further to go in terms of price and time. Still, our base case is the longer-term bull market remains intact. Indeed, with stocks, it’s often two steps forward, one step back.

For context, from the April market low to the recent peak, the S&P 500 had gained about 14%, which was approaching the median rebound of about 17% that we have seen following past drawdowns since 2009. And given these gains, we have been expecting a choppier environment as we move into the historically more challenging seasonal period.

Moreover, even though the S&P 500 historically has tended to add to gains by year end following strong first halves (average +9% additional return), there have often been hiccups along the way. Indeed, the market has averaged a maximum peak-to-trough pullback of 9% at some point in the second half following strong first halves.

Notably, the S&P 500 has averaged three market pullbacks of at least 5% per year historically versus only one so far this year. While always uncomfortable and typically accompanied by bad news, pullbacks are the admission price to the stock market. This is what provides the potential for higher longer-term returns relative to most other asset classes.

In late June, we downgraded our short-term view of the tech sector following its strongest two-month outperformance cycle since 2002. Our work suggested the rubber band had become too stretched and expectations too high in the short term. Indeed, prior to the recent sharp pullback, the sector had been up 36% year to date; even with the recent setback, it remains up 23%. We maintain a favorable longer-term view of the sector, but this corrective period likely has further to go.