Tech stocks were battered during the first half of the year, but they could be facing more pain in the second half of the year as the economy faces a slowdown, experts said.
The Nasdaq Composite has seen losses that are over a third of its value compared to its all-time peak last November. Even in June, the losses have added up to be 9.9%.
While some tech stocks have rebounded slightly, well-known behemoths are not immune to the pain. Even Apple (AAPL) has fallen by 21.3% during the past six months while Alphabet (GOOGL) is down a whopping 21.95%.
Higher interest rates could hamper valuations and investors should expect more fluctuations in prices, Mike Loewengart, managing director, investment strategy of E-Trade from Morgan Stanley told TheStreet.
The Federal Reserve has indicated it plans to hike rates several times in 2022.
“With the Fed taking an even more aggressive approach to tame inflation, investors should expect the sector to remain volatile,” he said.
Rising interest rates typically result in a negative correlation with tech stocks, especially those in the growth phase and facing more expensive loans.
“While rising rates have played a role in the decline, inflation and decreasing consumer sentiment are other headwinds dragging down the sector,” he said. “Many of the big names that were the darlings of the market in recent years have announced hiring slowdowns, which could be a sign of slowing earnings expectations.”
The increase in interest rates will be a "significant headwind" for tech stocks in the second half of 2022, Robert Johnson, a finance professor at Creighton University, told TheStreet.
"Not all tech stocks are created equally," he said. "Apple will suffer less from this phenomenon than the typical tech stock."
How to Invest in Tech
While Europe and the U.S. are tightening their economies and trying to slow down consumption of the purchase of goods, there are two large economies in the world that are aggressively easing: China and Japan, Thomas Hayes, chairman of Great Hill Capital in New York, told TheStreet.
Investors can allocate funds to purchasing high quality Chinese tech stocks that “have been left for dead,” he said. “One way we are playing the aggressive stimulus and easing as China comes out of lockdown is by buying tech stocks like Alibaba, which is up 40% off its March lows since the Chinese government pivoted away from crackdown to stimulus.”
Alibaba (BABA) has a “long way to run over the next few years to revert back to intrinsic value,” Hayes said. “There will be ‘fits and starts’ and speed bumps along the way, but we view these businesses as extremely undervalued at current levels.”
U.S. value tech stocks are now nearing attractive levels after a six month rout, he said. Investors could consider Meta (META), Paypal (PYPL) or Taiwan Semiconductor (TSM), he said.
Household names like Microsoft (MSFT), Apple and Alphabet are stocks that are likely to recover this year, Art Hogan, chief market strategist B Riley Financial, told TheStreet. The valuations of those stocks had “gotten to a place that is pretty silly. Microsoft was trading below its 10-year average multiple.”
These stocks could be recession resistant because they produce good cash flow and pay large dividends and could be the stocks that lead to the “tech recovery,” Hogan said.
Software stocks will continue to flourish heading back to the second half because these companies are less capital intensive, he added.
The market has been trying to price in a recession during the next 12 months - equities typically fall by 30% to 40% during them, Hogan said. The average stock in the Nasdaq is down 48% while the S&P 500 is down 30% in 2022.
“The markets have done a good job of pricing in a recession that might not come to fruition,” he said.
During the last three months, in every regional Fed bank survey the prices paid index for consumer goods and services in their region has gone down, a positive good indicator for the market.
“That is good for equities and the tech sector will lead since it is down the most,” Hogan said. “If we have something break right, you have a nice rally into the year end that is lead by technology.”
The market cap of tech stocks is the most important factor to consider at this point in the cycle, Sameer Samana, CFA, senior global market strategist at Wells Fargo, told TheStreet.
“Larger tech companies have more entrenched user bases on either the enterprise or consumer side with larger customer bases,” he said. “They will have more optionality with respect to an economic slowdown.”
Investors should focus on larger cap tech stocks that provide dividends and conduct stock buybacks, Samana said.
“We like energy, healthcare and tech stocks,” he said. "Tech as a whole may not have to hit a bottom. Avoid e-commerce and EVs. Focus on U.S. larger cap higher quality names compared to international tech stocks."
The tech sector will have a "much easier time" when the amount of uncertainty starts to peak, Samana said. "We are starting to get there with larger rate hikes and inflation expectations are starting to plateau. The tech sector could lead the market out during the second half."
Investors need to focus on being selective in figuring out which tech stocks could rally by verifying earnings and cash flows that are growing, Steve Sosnick, chief strategist of Interactive Brokers, a brokerage based in Greenwich, Conn., told TheStreet. Metrics such as price to sales do not reveal much information.
"You can't grow earnings without growing sales, but you can easily grow your sales without growing earnings,” he said. "This is not the environment to just play a cool story."
Why Semis Will Make a Comeback
Semiconductor manufacturers are well-positioned to benefit from reshoring incentives, including the industrial policy that has attracted bipartisan support, Dan Katz, co-founder and portfolio manager at New York-based investment firm Amberwave Partners, told TheStreet.
“Intel (INTC) is one of our fund’s largest tech exposures and we expect them to benefit substantially from these secular tailwinds, including as a result of their landmark investment in Ohio,” he said.
Other companies that are critical to the semiconductor manufacturing process could also rebound, including LAM Research (LRCX) which is another large tech exposure in their fund, Katz said.
Companies that reinvest in the communities in which they do business like Intuit (INTU) are “poised to outperform peers that are most exposed globally,” he said.
