Tech Stocks Take a Tumble After Powell’s Rate Cut Hint: Are Fundamentals Still Strong?
Jerome Powell’s hint at a potential interest rate cut in September, initially welcomed by investors, unexpectedly triggered another sell-off in tech stocks. Despite the Federal Open Market Committee’s (FOMC) meeting indicating a possible easing of monetary policy, disappointing economic data and recent earnings reports shifted sentiment towards risk aversion, leading to a drop in tech shares.
Key Takeaways:
- A Wave of Sell-offs: The Nasdaq 100 tumbled 2.7%, and the Magnificent Seven tech stocks declined by 1.9% following Powell’s comments. The iShares Semiconductor ETF (SOXX) took a significant hit, plummeting over 7%.
- A Deeper Dive into Fundamentals: While the sell-off caused anxieties, some investors saw opportunities to acquire tech stocks at potentially attractive valuations, considering the strong fundamentals of many companies.
- Focus on AI: Veteran investor Ed Yardeni believes that the selloff might be over, as companies like Alphabet Inc. (GOOGL) and Microsoft Corp. (MSFT) demonstrate their commitment to artificial intelligence (AI) by allocating significant capital to developing AI infrastructure.
- MegaCap-8 Stocks’ Performance: Despite the downturn, the MegaCap-8 stocks (excluding Tesla) are still enjoying a strong year, with several showing impressive year-to-date growth.
A Detailed Look at MegaCap-8 Stocks
Yardeni highlights the valuation discrepancies within the MegaCap-8 group, suggesting that some stocks present attractive opportunities for investment. For instance, he sees Nvidia Corp.’s (NVDA) forward P/E ratio of 32.1 as extremely low considering its 60.9% expected forward earnings growth. He also believes that Meta and Netflix Inc. (NFLX) are not fully valued for their strong earnings growth, which almost matches their respective forward P/E ratios.
However, he emphasizes that some forward multiples are harder to justify. Tesla Inc.’s (TSLA) forward P/E of nearly 80, with less than 6% forward earnings growth, suggests investor optimism around the company’s future with autonomous vehicles and an electric semi-trailer truck. Both Apple Inc. (AAPL) and Microsoft have forward multiples that appear slightly high, contingent on Apple’s successful launch of its AI offering, Apple Intelligence, and Microsoft’s expectation of significant returns from its recent AI infrastructure investments.
Here’s a comparative snapshot of the MegaCap-8 stocks, highlighting their forward multiples and expected earnings growth:
- Tesla: 79.0 forward P/E, 5.8% forward earnings growth
- Amazon.com Inc. (AMZN): 34.2 forward P/E, 36.9% forward earnings growth
- Nvidia: 32.1 forward P/E, 60.9% forward earnings growth
- Microsoft: 31.4 forward P/E, 13% forward earnings growth
- Apple: 30.3 forward P/E, 10.4% forward earnings growth
- Netflix: 29.1 forward P/E, 32.4% forward earnings growth
- Meta: 21.1 forward P/E, 22% forward earnings growth
- Alphabet: 20.6 forward P/E, 20.1% forward earnings growth
Navigating the Market Volatility
This recent sell-off in tech stocks highlights the volatile nature of the market and the need for investors to carefully analyze fundamentals and valuations. While Powell’s comments may have triggered some anxieties, the underlying strength of many tech companies, especially those deeply invested in AI, might present promising investment opportunities for those seeking long-term growth. This period of volatility serves as a reminder to investors to remain informed, approach investment decisions strategically, and stay attuned to the evolving market landscape.
