Tech’s Rollercoaster Ride: Excess Rung Out, Expectations Reset, and a Shift Towards Cyclical Stocks
New York, NY – In a market characterized by volatility and rapid shifts, tech stocks have been on a wild ride, experiencing a dramatic surge followed by a sharp decline and now a potential resurgence. Keith Lerner, Co-Chief Investment Officer at Truest Wealth, offers insight into this dynamic, highlighting the cyclical nature of the tech sector and the impact of investor expectations.
Lerner explains that the tech sector’s recent downturn was triggered by a period of "excess complacency," driven by speculative trading and a significant multiple expansion. He likens the market to a stretched rubber band, suggesting that tech stocks became overvalued as investor expectations reached unsustainable levels. This, he argues, ultimately led to a correction, with the tech-heavy Nasdaq 100 index pulling back as the "bar for positive surprises" was reset lower.
"That last move into June, that last ramp-up, was all multiple expansion," Lerner explains. "The bar was too high, which is why even though we had decent earnings this earning season, tech sold off."
However, despite this recent downturn, Lerner remains positive about the long-term outlook for tech, pointing to a potential shift back towards the sector as the economy cools. "If we are in a cooling economy, we think investors will rotate back into tech to take advantage of that premium growth," he says.
This shift follows a recent trend, with cyclical sectors like industrials, financials, and energy outperforming in the market this week. This is despite concerns about a potential recession, with Lerner citing positive economic data and a reassessment of recession risks, particularly after the release of the initial jobless claims data, as drivers for this shift.
"If all of a sudden you’re thinking you’re going into a recession and then you’re not so sure and maybe it’s a soft landing, then the market rotated back into these cyclical areas of the market," he notes.
Lerner’s perspective on the tech sector highlights the importance of investor sentiment and the cyclical nature of the market. His prediction of a potential rotation back into tech in the latter half of the year suggests that the roller coaster ride for tech stocks is far from over, with investors keeping a close watch on economic indicators and market trends.
Tech Stocks Rebound as Investors Shift Focus to AI and a Potential Soft Landing
The tech sector, which had experienced a sharp sell-off in recent months, is showing signs of resilience as investors shift their focus to the potential of artificial intelligence (AI) and a possible “soft landing” for the economy. This shift comes after weeks of concerns about recession risks, which prompted investors to favor cyclical sectors like industrials, financials, and energy. Keith Lerner, co-chief investment officer at Truist Wealth, attributes the rebound to a reset in investor expectations, stating that the excess exuberance seen in the market earlier this year has been largely abated. He believes that the bar is now set lower for positive surprises, which is ultimately a positive development for the tech sector.
Key Takeaways:
- Tech sector rebounds: After a 40% rally from November to June, the tech sector experienced a significant pullback. However, investors are now turning their attention to the potential of AI and a possible soft landing for the economy, leading to renewed optimism.
- Excess exuberance fades: Lerner explains that the market’s previous exuberance was driven primarily by multiple expansion. This overvaluation has since been corrected, leading to a more realistic valuation of tech stocks.
- Earnings expectations reset: The bar for positive surprises has been reset lower, meaning that even modest earnings growth could be seen as positive news for the sector.
- Shifting focus to AI: The release of Apple’s iPhone and the potential acceleration of the PC cycle are expected to draw attention back to the AI sector in the coming months.
- Cooling economy favors tech: Lerner argues that in a cooling economy, investors are likely to rotate back into tech stocks, seeking growth potential.
Understanding the Tech Rebound: From Excess to Reset
The tech sector’s recent performance is a testament to the shifting sentiment among investors. Lerner highlights “excess complacency” as the main driver behind the sell-off, suggesting that the market’s optimism was fueled by unrealistic expectations of growth. The rapid multiple expansion for the “Magnificent Seven” tech giants, which peaked at a valuation multiple of 34, illustrates this point. The subsequent pullback, bringing the multiple down to 28, reflects a more rational assessment of these companies’ growth prospects.
Lerner believes that the correction process has led to a “resetting of the bar” for expectations. The market is now less likely to react negatively to even modest earnings growth, as the previous high bar for positive surprises has been lowered. This shift in sentiment could provide a tailwind for the tech sector, as investors reconsider their investment strategies in light of the changing economic landscape.
A Soft Landing vs. a Recession: The Market’s Dichotomy
The recent rally in cyclical sectors, despite growing concerns about a recession, points to a growing belief in a potential “soft landing” for the economy. While the likelihood of a recession remains a concern, recent economic data, such as the better-than-expected initial jobless claims report, has fueled optimism about a less severe downturn.
Lerner sees this shift in market sentiment as a healthy development and suggests that investor confidence in a soft landing is behind the rotation away from tech and towards cyclical sectors. However, he maintains that the economy is indeed cooling and believes that investors will eventually return to tech stocks as growth prospects remain relatively strong in the sector.
The Tech Landscape: More Than Just a Monolith
While the term "tech" is often used as a catch-all term, Lerner emphasizes that the sector is vast and diverse. Investors should not view tech as a monolithic entity, but rather as a collection of sub-sectors with their own unique characteristics and growth prospects.
Lerner highlights the importance of semiconductors and hyperscalers within the tech sector, stating that investors who are bullish on tech are likely to be positive on these sub-sectors. While the software sector may offer less compelling potential, Lerner remains optimistic about the overall tech sector and the investment opportunities it presents.
In conclusion, the recent tech rebound showcases the dynamic and unpredictable nature of the market. While recession risks remain a concern, a growing belief in a soft landing, coupled with a resetting of investor expectations and the potential of AI, is driving renewed interest in the sector. As the economy continues to evolve, long-term investors should pay close attention to the evolving landscape within the tech sector.
