Investors Still Waiting for Signs of a Bottom in Technology Stocks

Technology stocks remain under pressure as the Fed ramps up its tightening campaign to slow inflation, thus boosting the odds of a damaging recession.  Despite this year’s sharp decline, however, the valuations of tech companies still haven’t fallen far enough to entice buyers. 

According to data from Bloomberg, in the three recessions over the past 20 years, the multiples of the Nasdaq 100 Stock Index ($IUXX) (QQQ) have bottomed at around 13 times earnings estimates on average.  Despite this year’s -30% plunge in the Nasdaq 100, it is still trading at 19.8 times projected profits, well above past valuation troughs.

With most profit estimates of technology stocks expected to fall as analysts factor in the deteriorating economy, valuations will see upward pressure as the denominator in the price-to-earnings equation shrinks.  As a result, Miller Tabak said, “it’s going to become more evident that earnings estimates are going to have to come down, and as these estimates fall, it will show that many of these stocks are still expensive.” 

Stocks in the technology sector have seen earnings estimates fall this year by more than the broad-market average.  According to Bloomberg data, estimates for 2023 profit growth for technology stocks in the S&P 500 ($SPX) (SPY) have declined about six percentage points since the start of 2022, compared with a drop of 4 percentage points for the broader index.

If the Nasdaq 100 tomorrow closes lower on the quarter, that would be the third straight quarterly drop, the longest since a similar streak that ended in Q3 of 2002.  Crossmark Global Investments expects tech stocks to struggle until inflation cools and the Fed signals it's nearing the end of its tightening campaign.  However, Crossmark Global Investments said, “as long as the consumer is OK, which they are, and corporations are OK, which they are, it’s hard to see a big downside” in technology stocks.

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