Well that was quick.
For a brief time, it looked like water had been thrown on the red-hot tech sector. Then stock investors executed one of their favourite bull market strategies: adding to positions by scooping up shares at a discount.
That buying sent the tech-heavy Nasdaq 100 index as much as 0.9% higher on Tuesday. The group was also the best-performing sector in the S&P 500.
“That was just a little nervous selling as we awaited second-quarter earnings results,” Diane Jaffee, a senior portfolio manager at TCW Group, which oversees $US195 billion, said to Business Insider by phone. “We shouldn’t get so hung up on just a little bit of market rebalancing.”
The recovery in tech shares is the latest example of investors buying the dip, a tried and true method that’s underpinned stock gains for the past eight years. We’ve seen equities escape from seemingly dire straits on multiple occasions.
For evidence of this, look no further than the S&P 500’s 1.8% single-day decline last month. The index recovered 85% of that loss over the following three days, the second-fastest retracement of a loss that big in S&P 500 history, according to data compiled by Bank of America Merrill Lynch.
Going further back in time, after the S&P 500 fell by 5.3% over two trading sessions following the UK’s vote last June to leave the European Union, the benchmark recovered those losses in about a week.
The same dynamic was in play when China unexpectedly devalued its currency in August 2015. After the S&P 500 underwent an 11% correction, traders bought the dip and restored the benchmark to its pre-sell-off levels within about two months.
Meanwhile, improving earnings growth for US corporations is also painting a rosy picture, particularly for tech stocks. Companies in the sector saw 21% profit expansion in the first quarter, the best of any group, according to Bloomberg data. It’s expected to see 14% earnings growth in the second quarter, almost double that of the S&P 500.
If there’s an argument against tech stocks right now, it’s that share prices have run too far. In a recent research note, Bank of America highlighted the ratio of tech enterprise value to sales, which sits at its highest since the dotcom bubble, relative to the S&P 500.
However, the firm found that the price-to-earnings ratio (P/E) for the group remains low relative to history. The resulting impasse highlights the situation facing tech stocks: for every negative indicator, there’s a positive one to offset it.
Hence the continued buying on weakness.