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Why You May Want to Consider Buying the Dip in US Tech Stocks

Nov 09, 2018

 

  • The Nasdaq Composite Index (CCMP) is trading at a 25.56% premium to the S&P 500 Index (SPX) on a next-twelve-month price/earnings (NTM P/E) basis -- the current 25.56% premium of the Nasdaq Composite to the S&P 500 falls within the 78th percentile when looking at the last 6 years of trading levels, as seen in the chart below. 
     
  • Investors sold off US tech stocks in October driven by several concerns, including the potential impact from the US-Sino trade war on supply chains of tech companies and their international growth prospects -- in October, the Nasdaq Composite fell 9.10% while the S&P 500 only fell 7.28%. 
     
  • US tech stocks, which have traditionally relied heavily on debt to stimulate growth, also face issues amid the US Federal Reserve raising interest rates.  
     
  • The October sell-off of US tech stocks was also partially driven by concerns of deaccelerating growth in FAANG stocks’ earnings -- as per CY3Q2018 financial releases, Facebook (FB) forecasts adjusted earnings growth to slow from 20% in 2018 to 5% in 2019, Alphabet (GOOGL) forecasts adjusted earnings growth to slow from 19% in 2018 to 6% in 2019, and Amazon (AMZN) forecasts adjusted earnings growth to slow from 173% in 2018 to of 32% in 2019.
     
  • The October sell-off of US tech stocks may be an overreaction to trade war and growth deacceleration concerns. Unlike industrial, financial, and consumer discretionary stocks, tech stocks have been less exposed to traditional cyclicality due to the disruptive nature of their business models.  
     
  • Although FAANG stocks’ CY3Q2018 financial releases were bleak, the overall tech sector had a better earnings season than any other sector in the S&P 500 – 96% of the 45 tech stocks in the S&P 500 to report earnings (as of 11/05/2018) beat consensus analyst estimates, generating an average surprise of 7%.
     
  • The dynamic of the US tech sector will change dramatically in 2019 as four notable “unicorns” are set to IPO, including Uber, Airbnb, SpaceX, and WeWork -- these substantial IPOs will likely drive investment into tech indices and ETFs as investors seek to gain exposure to the IPOs upside potential while lowering unsystematic risk generated from investments in single stocks.

NTM P/E of the S&P 500 Index (SPX) vs. NTM P/E of the MSCI EAFE Index (MXEA) over 6 Years 

Source: Bloomberg