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Is the party over for tech stocks?

02/23/2021 | 09:16am

Futures on the Nasdaq are down by almost 2 percent today, following yesterday’s drop. This comes after the Nasdaq and the benchmark S&P 500 posted their biggest one-day percentage declines in February on Monday as inflation fears and overheating in asset markets hit the so called "stay-at-home" winner stocks that had led the Wall Street rally from the pandemic lows.

Whether we call this "reflation trade", "rotation" or "arbitrage", financial markets are shaking up around investment flows that are in the process of being reoriented. Will this continue? That is the question. The economic and health context undeniably gives the proponents of a new deal more arguments than they had a few weeks and a fortiori a few months ago.

The beginning of the disgrace of technology stocks was very visible yesterday in the United States: the Nasdaq lost 2.63% while the Dow Jones grabbed 0.09% at closing. This is not the first attempt at rotation in the last year. The previous ones had finally failed after a few sessions in the form of a firework display for cyclical stocks. This time, the macroeconomic context is different. Vaccination is beginning to prove its effectiveness. The sharp decline in technological values of the previous day occurred, not entirely coincidentally, when the United Kingdom unveiled data showing that the vaccines most used across the Channel significantly reduce hospitalizations. But we all know that the main political marker of the pandemic is the ability of healthcare systems to accommodate patients.

If all goes according to plan, economic growth will return to record levels. First, because the basis of comparison will be very weak in the spring. Second, because businesses will gain confidence. And finally because certain sectors that have reached a break-even point will start to generate business again. It's almost mechanical. In this context, investors are logically looking at stocks that will benefit from this economic pull, the so-called cyclical stocks. They are also looking at highly discounted stocks, which are collateral beneficiaries of the situation.

Why are technology stocks falling in the current context? Well, these companies are growth companies, which are valued on the promise of ever-increasing profits over the long term. If other short-term opportunities emerge, they necessarily lose their appeal. And there was a "TINA" effect ("there is no alternative") that has made technological values a must. Despite questions about asset rotation that emerged at the end of the summer, investment in technology stocks remained the most bottled-up bet among managers at the beginning of 2021, because it remained reassuring and rewarding. However, new opportunities have emerged.

This consensus on the technology sector has also created a monster: the two most watched indices in the world, the S&P500 and the Nasdaq, are dominated by technology stocks (the same ones, moreover). This can create a downward bias in all markets, while only a handful of stocks, the largest, find themselves oversold after being overbought. This will have to be monitored in the days to come, especially since the current situation resonates with the theories according to which the financial market as a whole is not in a speculative bubble situation, but that it harbors pockets of exuberance that are difficult to justify.

January UK employment figures, the Conference Board's Consumer Confidence Index and the Richmond Fed's Manufacturing Index are due today. Jerome Powell is scheduled to address parliamentarians this afternoon.

Romain Fournier
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