Tech stocks could be nearing a bottom as the Nasdaq Composite hits historical lows and tech darlings such as Meta (FB), Google (GOOG), Amazon (AMZN) and Apple (AAPL) draw bargain hunters.
“The Nasdaq is not too far from its 61.8% Fibonacci retracement level which is moving close to its 71% historic retracement,” said Stam Stovall, chief strategist at brokerage CFRA. “The tech sector is also currently 16% below its 25-year, 200-day moving average so a near-term bounce is likely.”
The first innings of that reversal seemed to happen Friday when growth stocks clawed back steep losses accumulated in recent sessions. The Nasdaq rebounded 3.82% to 11,805 while the S&P surged to 4,023, halting a skid into bear market. Despite a 25% and 16% drop in the Nasdaq and S&P so far this year, Stovall expects growth stocks could still end 2022 in the green.
“This is the 20th year since World War II that the S&P 500 has had a gain of over 20% in a prior year (it rose 27% in 2021 for instance) and the market fell over 11% on average during the first quarter [like this year]. Every time that has happened, the market has recovered everything it lost before the year was out.”
The strategist sees a strong dip-buying opportunity in application software firm Salesforce (CRM), chip maker Applied Materials (AMAT), semiconductors concern Broadcom (AVGO) and Microsoft (MSFT).
Craig Erlam, analyst at Oanda in London, agreed tech could bounce back in the near term but said gains will likely focus on high quality names. “We are close to a bottom,” he said. “I wouldn’t be surprised if in the next month or two the blue chips [tech] recover though I don't think they will finish the year higher than where they started.”
Quelling inflation
How much they strengthen—or whether they squeeze out any gains–will depend on future inflation and how the Federal Reserve maneuvers to stem it through interest rate hikes. Already, the market is pricing the potential for another 150 basis points of increases this year. If that doesn’t quell soaring prices, Fed Chief Jerome Powell may have to hike again, further pressuring stocks.
For more robust gains to emerge, inflation (which last month rose 8.3% vs an 8.1% expectation) will need to head down toward the 4% range, Erlam posited, adding that it could take 12 months for that to occur.
Still, following Nasdaq’s drop last week, investors can now pick and choose from a wide array of strong businesses “that are not substantially leveraged and have massive profits and revenues,” he added. Among such firms are Meta, Netflix (NFLX) and Amazon. “Facebook has challenges with its younger audience, Netflix is experiencing slow growth and Amazon has warehouse issues but these problems won’t last forever. These are great companies with huge potential,” Erlam noted.
Other firms may struggle more in the downturn, including stay-at-home stocks such as Peloton (PTON), whose home fitness equipment franchise is floundering now that customers are returning to work. Market watchers said the firm and similar businesses could continue to face difficulties, or become attractive buyout targets.
“Stay-at-home stocks did well with folks working at home but now that the world has reopened they have been caught off guard as they didn’t have plans in place on how to sustain this change,” Erlam continued. “The Pelotons and Zooms (ZM) are going to have much bigger problems to convince people to use their platforms even though they don't need to. These companies could be prime targets for a buyout.”
Not so fast
Chris Matta, president of crypto investment firm 3iQ Digital Assets, disagreed a near-term bottom is in the cards. “It’s possible but improbable,” he said. “We are in a very precarious macro environment and suck in a hyperinflationary and recessionary cycle. We are going to see more pain. The markets will probably trade sideways until we see how inflation plays out.”
When the dust settles, however, Matta said cryptocurrency stocks and tokens could climb back sharply, especially his favorite Coinbase (COIN), which has tumbled 73% since January. “Coinbase has been stuck and their revenues have dropped as the crypto market has been in bearish mode for six months. But when you look at their custody, exchange and venture business, it is still an attractive bet,” Matta said.
He sees leading tokens such as Bitcoin and Ethereum rebounding, even after the Terra Luna coin crash, which he noted will likely strengthen regulation and governance in the nascent digital-assets sector.
Crypto aside, Matta also likes Apple and Tesla (TSLA) as long-term holds. “Apple’s products are relatively inelastic [meaning they hold their value during economic shocks], even in recessionary environments,” he said. “This makes it less volatile and a good company to hold.”
Meanwhile, “Tesla is dominating electric cars right now. Everyone I know has either ordered a Tesla or is looking to do so and their production numbers and sales are growing exponentially. It has so much momentum. It has a better chance of outperforming other tech stocks if the macro environment worsens.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Ivan Castano
Ivan Castano is a seasoned financial editor, corporate content specialist and journalist with over two decades’ experience writing for leading publications including Bloomberg, Forbes, Barron’s, MarketWatch, Euromoney and FT groups, among many other leading titles. He enjoys writing about the emerging markets, corporate finance, technology and investing.
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