Tech stocks are feeling most of the pressure from a recent market selloff, highlighting how an extended downturn in the sector could impact the broader equity indexes.
Monday saw a sharp drop which caused the S&P technology sector to go down 6.7% since the overall S&P 500 closed at a record on September 2nd, compared to a 5.2% decline for the wider index over the same time.
Meanwhile, the Nasdaq Composite, which is tech-laden, is down 7.3% from its September 7th closing high. It is fast approaching a 10% correction.
What’s causing the tumble?
There are worries in the markets in recent weeks, caused by the expected unwind of the Federal Reserve’s easy-money policies, a rise in Treasury yields, and a tussle among US lawmakers concerning the country’s debt ceiling.
Many investors seem unwilling to cut their exposure to technology-focused stocks, which have been at the forefront of the market for the last ten years and are expected to deliver strong earnings growth even if the economic climate becomes untenable.
Over the years, dips have often resulted in frenzied buying. However, heavy weighting in broader indexes, elevated valuations, and wide ownership have led investors to worry about what happens if tech and its closely related names underperform for long.
What are metric investors looking at?
To determine if they stay on course or pare back holdings, investors are considering:
- Crowd levels in tech stocks
- The tech weighting in the S&P 500
- The tech valuations
- The earnings the industry has enjoyed over the years
The pandemic changed things. Every industry suffered, while those that inherently/ by design lent themselves to the new reality thrived. The overall stock market has not resurged as well as the other industries in many of the indexes.
Due to the uncertainty, all we can do is wait and see if any major changes change things.