Stock-Market Rout: Why it’s Too Early to Call Tech Plunge the Start of a Correction

There are certainly a lot of headwinds weighing on the tech sector, and the day after the market plunged, many people made the assumption that a tech-sector correction has begun.

The bottom line: We have too many concerns and too many questions left to answer.

Last week, Nasdaq fell 7%, and the S&P 500 fell over 2%. The Dow Jones Industrial Average is down close to 12%. The Dow’s decline is larger than the traditional correction that marks market bottoms. Tech is getting hit particularly hard. Following the first decline of the year, other tech stocks took it harder, but the momentum in the bottom two months or even months — meaning those quarters where earnings and growth statements tend to outpace Street expectations — don’t exactly paint the tech sector as a “market crash” type of event.

Instead, it looks more like a pullback in the overall market. The S&P 500 has now climbed in eight of the past nine years (it had gained in six of the eight prior years before this and is now headed in that direction, too).

But we’re approaching the toughest half of the year for the S&P 500, and we have strong concerns that sentiment can shift in the wrong direction — especially with the new-and-improved-Trump-Enterprise Tax cuts about to go into effect.

What’s interesting is that the market and the S&P 500 have not adjusted to the planned changes of the tax cuts yet. Instead, they’re reacting to how much companies reacted to them in the past few years. Companies have not reduced guidance or earnings expectations as a result.

What’s more, Amazon and Apple, who were among the biggest beneficiaries of the tax cuts and could be major contributors to growth in the second half of the year, appear to be more sensitive to investor sentiment.

Amazon disappointed investors yesterday. Apple also disappointed investors, and Apple CEO Tim Cook said he expects iPhone sales to be at the low end of expectations, later this month. (It does look like the iPhone upgrade cycle is starting later than normal, and we would like to speculate that this means the phone is less popular, but we’re sticking with the most recent figures from Apple.)

As a result, Apple and Amazon were among the hardest hit in the large-cap tech space after the market close.

Further down in the rankings, we saw similar action in some very well-regarded companies like Microsoft, eBay, and Netflix.

Investors will want to continue monitoring these names.

For 2019, we see several important indications:

Market gains accelerated into the first quarter of 2019, but breadth across sectors weakened. That’s a bad sign for the market.

S&P 500 earnings estimates for 2019 and 2020 will likely still hold up. But we are expecting earnings estimates to come down. That could make valuations harder to justify.

Portfolio managers and research analysts will want to develop opinions on the long-term potential of major stocks in the future. You may want to approach tech names carefully in the coming weeks, but don’t make snap judgment calls, and make sure to have time to get a feel for valuation.

Among the concerns affecting the tech sector:

Some big names don’t have enough growth potential to justify their current valuations. Microsoft, for example, trades for over 25 times expected earnings for this year. But Intel trades for just 11 times expected earnings. Is the Qualcomm trade factored into Intel’s valuation?

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