INVESTMENT STRATEGY

Liz Looks at: Technology Stocks

By: Liz Young · November 09, 2022 · Reading Time: 5 minutes

Check on Your Tech

No matter which way you slice or dice it, Technology stocks have had a tough go in this environment. Since the peak in the Nasdaq (the most tech-heavy of major indices) on November 22, 2021, the tech sector of the S&P is down 26%. The only two sectors that have done worse over that period are Consumer Discretionary (-36%) and Communications (-42%). It’s also worth noting the largest weight in Discretionary is Amazon, and the largest weight in Communications is Alphabet, both companies we relate to “tech” anyway.

Third quarter earnings season didn’t do much to improve sentiment within the sector, as some companies reported revenue misses, in addition to a number of reduced earnings outlooks for coming quarters. As it stands right now, with 91% of the S&P having reported, tech earnings growth contracted 1% year-over-year, and next quarter’s revisions have come down over 9%.

With this being the first quarter of a meaningful tone change in earnings (in my opinion), I don’t think it will be the last one of margin pressure. However, I do think it’s an indication that we’re moving through the “late cycle” sequence where earnings expectations fall and companies have to re-evaluate their costs for the next four quarters.

Cue the big cost of human capital for many tech companies…

The Cuts Keep Coming

As the typical sequence goes, markets fall first, then earnings contract, and the economy breaks last in a recessionary environment. I acknowledge that a recession is not guaranteed and there remains a chance we avert one. But, at this point in the sequence, it’s becoming clear that we may at least see recessionary conditions in some sectors, even if they don’t bleed into all facets of the economy. Tech is one of those sectors.

We have been diligently watching the labor market, partly because it’s such an important data point for Fed policy, and partly because we’re on the lookout for potential cracks to form. Although the monthly and weekly data continues to show strength and tightness (plentiful job openings, steady non-farm payroll gains, and no notable upticks in initial jobless claims), the announcements we’ve heard from several technology companies in the last couple months are a sign labor numbers could weaken sooner rather than later.

Three of the big tech names — Apple, Amazon, and Microsoft — have announced hiring freezes at least through the end of the year. Many other companies have announced layoffs and I expect these headlines to keep coming for a while.

In the midst of these announcements and a tough earnings season, it’s no wonder the FANG+ index, which includes many of the largest Tech and Consumer Discretionary names, has underperformed the broader index and been a drag on many portfolios. On a valuation basis, Tech is still one of the more “expensive” sectors in the S&P with a forward price-to-earnings ratio at 20.0x, but that’s down from 27.5x just one year ago, marking one of the largest P/E contractions in the index.

Tell Me Something Good

Yes, there is some good news here. First, the sectors that were perhaps the most inflated due to zero interest rates and historical levels of liquidity have come much closer to rational valuation levels. For long-term investors, a Tech sector down nearly 30% YTD is a much more attractive entry point than last year at this time and is something to consider shopping in over coming weeks and months. That said, it’s important for me to point out that I still expect one more market flush before this bear environment is really behind us.

Second, as we work our way through the typical sequence, with our current position somewhere between earnings being hit and labor being hit, it means we’re getting closer to the end. The big question remains: how many other sectors of the economy will be hit? The answer will determine if we have a recession at all, and how severe it might be. I think it’s very possible that if we have one, it’s decently mild as far as unemployment and duration.

Third and last, although anything is possible and stranger things have happened, the chances of having back-to-back abysmal years in markets are slim — particularly post-midterm elections. And despite underperformance of many beloved large-cap tech stocks, the broader market has held up well over recent weeks with other sectors and size categories pulling their weight. Breadth is good.

Remember, markets bottom before the economy. Even if we do have a 2023 recession, by the time we’re in it or know about it, the market has likely already started to recover.

text

Want more insights from Liz? The Important Part: Investing With Liz Young, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

Listen & Subscribe


Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
SOSS22111002

TLS 1.2 Encrypted
Equal Housing Lender