The rout on tech stocks has been part of a broader positioning from investors away from the sector, at least for the time being. Outflows from tech funds reached the highest level this week since June 2019.
A net $1 billion flowed out of technology funds globally this past week, according to Bank of America Global Research. This was accompanied by the 3rd largest outflow ever from U.S. stocks funds -- $25 billion -- which is partly reflective of a garden variety sell-off and partly because dollar figures are larger now than they were years ago, of course, as the economy grows.
For tech, September has seen a move out of growth and less out of value, which has had its own troublers this month as concerns over the speed of the economic recovery emerge. The Nasdaq 100 fell as much as 13% between September 2 and early trading September 24, as the market has clearly re-rated valuations for companies with secular growth trends that can power through economic headwinds, like e-commerce, cloud and streaming. Meanwhile, value stocks on the S&P 500 only fell about 9%, leading to a roughly 10% down-move — a correction — for the aggregate S&P 500.
Concern that big tech companies like FAANG stocks, cloud and software companies and data center chip makers serving cloud and storage needs are pulling forward too much demand from later years is the prevailing fear.
To put the recent outflows in perspective, if investors were to pull this amount from tech funds for an entire year, it would be over a $52 billion outflow. That’s about 41% of the assets under management of the Invesco QQQ tech etf (QQQ) - Get Invesco QQQ Trust Report, which manages $125 billion. The QQQ holds growth tech giants like Apple AAPL Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report, Tesla (TSLA) - Get Tesla Inc Report and Nvidia (NVDA) - Get NVIDIA Corporation Report, all of which have fallen hard.
When investors redeem cash from a fund, it forces the mangers (trades are automated in etfs) to sell in order to get the value investors hold back to them. The Nasdaq 100 fell 3.2% between Tuesday and Thursday morning and the QQQ fell 2.9% in that span.
But tech began rebounding Thursday mid-morning, with the Nasdaq 100 up about 2.4% from mid-Thursday to mid-afternoon Friday, as investors were clearly buying the dip in tech stocks. And these big tech stocks are expecting to see premium earnings growth compared to most other sectors for the next several years. One of the key questions now is whether or not potential valuation compression -- or mere lack of expansion -- will offset the strong earnings momentum enough to make the group an underperformer, especially of the V-shaped economic recovery continues as such.
While value has outperformed growth for much of September, Thursday was right back to the U.S. market’s old ways; the tech-heavy Nasdaq was up 1.8% by mid-afternoon, while large cap value was up about 0.7%.