Nasdaq 100 is almost at the same level where it was a year back. On April 20, 2021, Nasdaq 100 was at 13809 while today it is at around 14210, merely 3 per cent higher!
While the 1-year return is still in green, there is a nearly 13 per cent decline year-to-date (YTD) in the value since the beginning of 2022. So far, the technology stocks scenario has been different in 2022. The tech-heavy Nasdaq Composite Index supposedly entered bear market territory, down more than 20 per cent from its all-time high last November 1.
The phasing out of the Fed’s quantitative easing programme and the impending rate hikes in the US could be seen as the primary drivers for the tech-heavy Nasdaq to fall from it’s all-time high levels.
Some of the technology stocks were among the market favourites in 2021 after having been the part of the bull run post the market crash of 2020.
Possible causes for the decline include tighter monetary policy and rising interest rates driving a correction in technology stock valuations. In addition, slower growth is projected among some of the technology-related firms that helped the world go remote during the pandemic and delivered very strong growth and earnings.
So, is it time for investors to take a break from technology? Hardly, says Brian Daley, Head of Equity Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. “Technology has become such a force that it’s almost impossible not to consider it in today’s increasingly digitalized economy,” Daley says.
For example, the four largest companies in the United States by market capitalization are all widely seen as technology companies. “Leaving such a large and important sector out could add risk to portfolios,” Daley adds. Rather, current economic conditions call on investors to look a bit deeper into the technology sector and think carefully about which stocks can help them meet short- and long-term goals.
The stock market environment is no longer the same and several dynamics are at plays. Some of the companies are trading at a high valuation while some others are showing dip in profits.
Daley is of the view that the recent market volatility, driven by inflation, rising interest rates, monetary tightening and Russia’s invasion of Ukraine, favors high-quality, established companies whose stocks may be available at reasonable prices. Similarly, when it comes to investing in the technology sector, the current climate favors profits over concepts.”
In other words, companies with proven track records and solid earnings visibility versus early-stage companies developing exciting new products or services that have yet to produce substantial earnings.
Though some larger, established tech companies may seem overvalued, at a time of volatility and investor nervousness, “the stocks getting hit the hardest have been companies that don’t have profits and therefore trade at very high prices relative to sales,” Daley says. Further, many of the larger, established tech companies have the financial strength to consistently grow their dividends and increase cash returned to shareholders over a market cycle.
To a long term investor, holding a diversified portfolio by adding some of the blue-chip tech stocks at reasonable valuations may do the trick in generating decent returns in future.