Key Takeaway
- Tech’s rally stretched too far, prompting a rotation, but limited signs of a bubble.
- Valuations remain rich, but earnings momentum is still strong.
- While a further digestion period is likely, we retain a positive longer-term outlook.
What happened?
After a powerful run, the technology (tech) sector is under pressure, with investors rotating into areas that are more sensitive to potential Federal Reserve (Fed) rate cuts.
Key drivers of recent tech weakness include:
- A recent MIT paper questioning artificial intelligence’s (AI) near-term productivity impact.
- OpenAI CEO Sam Altman warning of a bubble in AI.
- A few recent mixed earnings reports from tech names, though broader trend remains robust.
- Tech’s strong balance sheets and low leverage make them less reactive to rate cuts compared to cyclical or capital-intensive sectors.
Our take
The rubber band for tech stretched too far—at least in the short term. Tech became overcrowded and vulnerable to negative headlines. Despite this, we remain constructive on the sector longer term as fundamental and technical trends remain supportive.
Bottom line
The weight of the evidence in our work indicates that the recent setback in the tech sector is a necessary reset within a still-constructive long-term trend.
The sector’s “rubber band” was stretched after its sharpest four-month rebound since 2000, making it more vulnerable to negative headlines. That said, tech’s trailing one-year return is not at an extreme.
While this digestion period likely continues near term, we view pullbacks toward the 50- and 200-day moving averages as opportunities. The main risk to monitor is a deterioration in earnings momentum—however, profit trends remain strong for now.
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