Finding Silver Linings in Tech Tumble

It's still early in 2022, but if advisors are fielding inquiries about the state of financial markets, it's likely some of those queries sound something like “What's wrong with technology stocks?”

Owing to a 28% weight in the S&P 500 – more than double that of the second-largest sector – when tech sneezes, the rest of the market, broadly speaking, catches a cold. Much to clients' dismay, that scenario is playing out in the early innings of 2022.

As advisors know, the lay of the land boils down to slowing economic growth, tightening monetary policy from the Federal Reserve, rising interest rates and persistent inflation, all of which are combining for a toxic brew that's sapping technology stocks. Even some of the high-quality tech stocks, of which there are plenty, are faltering.

Advisors can assist clients seeking tactical exposure navigate a tricky macro environment by helping them keep their eyes on the long-term ball when it comes to tech stocks and funds and there is some fodder for that case.

It's Not All Doom and Gloom

One bright spot in today's tech conversation is the conditions afflicting the marquee sector aren't permanent. That might serve to allay some client concerns and explaining this to clients is a straight-forward endeavor.

“Growth and many technology stocks have been hit especially hard because of the long duration of their earnings. A significant part of the value of technology stocks is their future earnings profile, and as investors lower their growth expectations and/or discount those future earnings at a higher rate, the present value for these stocks falls further and faster than the broader market,” says Morningstar's Dave Sekera.

Another bright spot: A sector that isn't know for offering value is doing just that at the moment. In the essence of not painting with a broad brush, advisors should impart upon clients that not all tech stocks are cheap and prioritizing specific traits (see below) is the way to go to realize real value and avoid value traps.

“We are currently focusing on those that have strong pricing power and are able to pass along their own cost increases to customers in order to maintain their own margins,” adds Sekera. “In this market environment, we prefer those companies with both stable cash flows and good near-term visibility into their earnings for this year, yet still have good prospects for long-term growth and large tangible addressable markets.”

Fortunately, some of the tech names that currently appear undervalued are quality companies, making it somewhat easier to deal with recent market calamity. Those include Adobe Systems (NASDAQ:ADBE), Microsoft (NASDAQ:MSFT) and (NYSE:CRM).

Perspective Matters

In times like these, perspective is all the more meaningful. Advisors have it while many clients lack it. That's why the latter have the former.

The perspective clients need to hear today revolves around economic growth and interest rates. The sky isn't falling on either front, meaning the sun will eventually rise again for tech stocks.

“Even with the growth rate slowing, we are forecasting real U.S. economic gross domestic product growth of 3.9% this year and 3.5% in 2023,” concludes Sekera. “Similarly, while inflation is running hot and will remain elevated for the next few months, we project it will begin to moderate in the second half of this year and continue to decline in 2023. Finally, as interest rates are set to increase, it should be remembered that they are coming off levels that were not that far from historical lows.”

Related: Banking on Buybacks in 2022