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#Investments — 15.06.2017

Equity markets: technology blues

Guillaume Duchesne

A temporary correction or the end of a rally?

 

Technology stocks have posted a sharp technical correction in recent days. In two days, the S&P 500 technology index shed 3.5%. A similar trend occurred in Europe. Indeed, the sector has been facing several negative factors: 1) the market is worried about the features of the future iPhone. Apple shares shed 6% between 9 and 12 June. 1) Valuation multiples in the technology sector are well below average. Valuations of rising “digital” stars—Facebook, Amazon, Apple, Netflix and Google—are particularly stretched. After their strong market performance, together they accounted for more than 10% of the S&P500 index by market capitalisation. 3) A broker’s note stated that technology companies had been massively bought for their defensive profile, like consumer staples stocks. The cyclical risk of their business might be underestimated, according to the broker.

Despite this challenging environment, tech stocks still show very good fundamentals which are not called into question despite recent market jitters. Without a doubt the sector has been massively bought for its long-term growth. Indeed, investors have focused on this sector for its growth in numerous areas (automation in manufacturing, increasing use of technology in the automobile industry, multiplication of mass-market technology products and digitisation of the global economy). Today the market needs to take a breather and the upside potential for most social-media company stocks seems limited at this stage.

However, following a temporary correction, the technology sector should win back investor confidence, as this major sector has good growth momentum.

Finally, it is too early to envisage a structural trend reversal on the stock markets. The market environment is still fundamentally favourable to equities in the medium term. By way of proof, despite technology-related concerns, investors have not cut their positions on the equity markets, but have used a sector rotation strategy to move into lagging sectors such as energy and banks. Albeit increasingly rare, there are still some opportunities to seize on the markets.