The NASDAQ Composite Index is well into bear market territory, down nearly 30% since its peak through last Friday.
“That makes sense given that tech stocks have higher valuations and typically come under pressure as rates begin to rise. In addition, tech stocks are generally “long duration” assets, which means they have stronger earnings growth and therefore higher earnings expected further out in the future,” Kristina Hooper, chief global market strategist at Invesco, wrote in an insight.
While the current sell-off started in the more speculative corners of technology, it has spread to larger companies with strong balance sheets.
“I believe the current re-rating has been overdone, especially since I believe the Federal Reserve will not ultimately tighten as much as markets currently expect,” Hooper said.
In a higher inflation environment, Hooper finds the technology sector has typically been attractive because it generally has wider profit margins and can therefore tolerate higher input costs. And the tech sector, while still expensive, has valuations that are far lower than they were during the tech bubble, according to Hooper.
This challenging environment, however, may be an opportune time for investors with longer time horizons to consider selectively adding to their technology exposure. The Invesco QQQ Trust (QQQ), which owns the most valuable stocks trading on the Nasdaq, is by a long shot, the most popular ETF that tracks the NASDAQ-100 Index and provides exposure to the biggest names in tech.
Hooper said the caveat is that there could be more volatility — and sell-offs — to come soon; however, any weakness should offer entry points for dollar-cost averaging into the technology sector for long-term investors.
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