Mega cap technology stocks early next year may struggle to rebound as many of the factors that led to their selloff this year are likely to remain. In addition, the earnings outlook, macroeconomic backdrop, and valuations of the mega-cap tech stocks may offer little support for a turnaround in 2023 after the worst year in 2022 for technology stocks since the 2008/09 global financial crisis.
The Nasdaq 100 Stock Index ($IUXX) (QQQ) has plummeted more than -30% this year, worse than the -18% fall in the S&P 500 ($SPX) (SPY) as the Fed and other global central banks aggressively raised interest rates. As a result, the surge in bond yields has made highly-valued tech stocks less attractive. Rising inflation and monetary tightening have also raised the prospect of a global recession next year that would undercut corporate earnings.
The 12-month forward EPS of the Nasdaq 100 has dropped more than 4% from October through December 16, compared with the drop about 2.7% for the S&P 500. Another measure shows EPS growth for the Nasdaq 100 next year has fallen to almost zero. In addition, the spread between the Nasdaq 100’s earnings yield and the 10-year T-note yield has narrowed to the least since 2009. Tuesday’s premium of about 49 bp is well below the 10-year average of around 191 bp. That makes tech stocks less attractive, even if the Fed slows tightening.
Tech stock valuations have fallen, but not necessarily by enough to suggest they have bottomed. The Nasdaq 100’s 12-month forward P/E of about 20.3 is in line with the 10-year average of 20.5. Earlier this week, Bernstein noted that tech stocks are trading at a 29% premium to the overall market, down from a November 2021 peak of 52% but still slightly above the historical average of 25%.
The technical situation is also not supportive of technology stocks. The Nasdaq 100 stock index has been trading below its 200-day moving average for the longest period in more than 20 years. Aurel BGC said, “the Nasdaq 100 is in big trouble here, trading below its 200-day average and just above a long-term uptrend line since 2009.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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