over 1 year ago • 2 mins
Tech stocks had one of their best days of the year last week, as a milder-than-expected US inflation report fueled hopes that the Federal Reserve (the Fed) might be closer to the end of its rate hikes. It was a great day for stocks generally, but tech outperformed every other sector, soaring 8.3% on the day, compared to the overall S&P 500’s (still stellar) 5.5%. And it got people wondering whether tech has already bottomed.
Unsurprisingly, strategists at Bank of America, the same folks who came up with FAANG 2.0, don’t think so. They say this marks only the start of a multiyear de-rating (decline in valuation) of tech and the old superstar “FAANG” companies – Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet) – driven by a sharp increase in service and wage costs for these labor-intensive companies. Furthermore, a higher-for-longer interest rate environment isn’t likely to be advantageous for high-growth companies like tech stocks. This chart shows how the de-rating of FAANG stocks so far (purple line) is considerably smaller than the historical de-ratings we’ve seen for other out-of-favor sectors or regions. The Nasdaq 100 may be down 28% this year but its enterprise-value-to-sales ratio of 3.71x is still above its 10-year average of 3.35x. In other words, tech still isn’t cheap.
That said, while tech stocks still may have further to fall, you probably don’t want to avoid the sector altogether. Instead, consider looking at the longer-term tech selloff as a good opportunity to pick up quality stalwarts like Apple (APPL), Microsoft (MSFT), or Oracle (ORCL). Alternatively, you could consider dipping into tech’s more resilient pockets like cybersecurity or robotics, through ETFs like the iShares Cybersecurity and Tech ETF (ticker: IHAK; expense ratio: 0.47%) or the L&G ROBO Global Robotics and Automation UCITS ETF (ROBG; 0.8%).
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