Technology stocks plummet, signaling a reversal; Wall Street sounds the "bottom-fishing" horn

Analysts say that although large technology stocks have been sold off in recent weeks, pushing the Nasdaq 100 Index into a technical correction, the brutal selloff is beginning to show some signals—signals that in the past have often foreshadowed an upcoming turning point in this sector’s trading.

One of the most important signals is that the valuation premium of large technology stocks versus the broader market has narrowed significantly. Historical experience shows that this kind of narrowing valuation premium (i.e., valuation compression) often lays the foundation for the sector to subsequently outperform the broader market.

Since setting a historical high in October last year, the Nasdaq 100 Index has fallen 11%. Its forward 12-month price-to-earnings ratio is 21x, only 1.7x higher than the S&P 500 Index.

Data show that since the turn of the century when the dot-com bubble burst, such a narrow valuation gap has occurred in only about a quarter of the time. When the valuation premium last fell to such a low level, the Nasdaq 100 Index subsequently set a historical high for the magnitude of outperformance versus the S&P 500 Index over the following year.

Of course, economic uncertainty driven by the Iran War may weaken many market signals that have previously proven effective; whether this indicator is still valid remains to be tested by time.

Big Tech stocks see a sharp pullback

Last Friday, the Nasdaq 100 Index entered a technical correction range (a decline of at least 10% from its recent high). This is the first time this kind of situation has occurred since April 2025—when then U.S. President Donald Trump’s tariff policies pushed U.S. stocks to the edge of a bear market.

While it is extremely difficult to pinpoint a market turning point, historically, “oversold” conditions are often viewed as more attractive entry opportunities. For example, in September 2013, when the Nasdaq 100 Index’s valuation premium versus the S&P 500 Index also fell to a low level, the index then went on to record the best relative performance versus the S&P 500 Index in six quarters.

Technology stocks have continued to face sustained pressure, mainly because concerns have been intensifying about whether massive investment in artificial intelligence (AI) will pay off, and the Iran War, which has kept escalating recently, has further hit risk appetite.

Deutsche Bank data show that the technology sector’s relative performance has fallen to the bottom of its past decade-long trend channel, while investor positioning is also notably low—only at the 28th percentile versus the historical average.

So-called “Seven Giants”—NVIDIA, Microsoft, Apple, Alphabet (the parent company of Google), Amazon, Meta, and Tesla—are all down at least 10% from their respective historical highs.

Taking NVIDIA as an example: since it set a closing record high in October last year, NVIDIA’s stock price has fallen by nearly 20%. With the stock price down and earnings expectations having been raised, NVIDIA’s forward P/E is currently about 19.6x, the lowest level since early 2019.

Investors typically use the price-to-earnings ratio to gauge a stock’s valuation level relative to expectations for future earnings.

Notably, NVIDIA’s P/E is below the overall S&P 500 Index by about 20x, which is fairly rare, because investors usually assign higher valuation premiums to high-growth companies.

Meanwhile, in the recent market correction, Microsoft’s P/E has also fallen—from 35x in August last year to around 20x—while its AI competition peer Alphabet’s P/E has similarly dropped from nearly 30x in January this year to about 24x.

Wall Street begins to buy the dip

Even so, because large technology stocks have long held the role of leading the market and serving as the earnings engine, Wall Street strategists have started paying attention to the continuously accumulating “oversold” signals and view them as the most attractive investment direction right now.

Michael ORourke, chief market strategist at Jonestrading Institutional Services, said: “This correction in tech stocks is positive and will create buying opportunities within the sector. Investors should take advantage of this period to selectively buy shares in companies they feel more confident about.”

Julian Emanuel, chief stock and quantitative strategist at Evercore ISI, said: “We are buying large technology stocks.” He believes the AI revolution will accelerate in 2026, and he also points out that the Nasdaq 100 Index’s forward P/E ratio versus the S&P 500 Index is attractive.

“More importantly, the valuations of multiple tech stocks are already below the level seen at the lows during the pandemic,” Emanuel said.

Other Wall Street professionals are also looking for opportunities in technology stocks that have been oversold, including Christopher Harvey of CIBC Capital Markets. The names he mentioned include Alphabet, Apple, NVIDIA, and Palantir.

Ohsung Kwon of Wells Fargo Securities expects that the Nasdaq 100 Index and large technology stocks are about to enter a period of outperformance versus the broader market.

Kevin Gordon, head of macro research and strategy at Charles Schwab, said: “The tech sector has experienced a more severe pullback than other industries, and recent capital allocation has also been quite weak. This increases the probability of a rebound.”

But he also warns about the risks: “The issue is that current optimistic earnings expectations have not yet fully reflected disruptions that long-term wars could bring.”

“In a harsher scenario, tech stocks may no longer have the defensive ‘safe haven’ attribute like in the past, and investors may shift toward more traditional defensive sectors,” Gordon added.

(Source: Caixin Global)