Tech Wreck Could Have Silver Lining

As of May 13, the S&P 500 is down 16.3% from its 52-week high. Applying the strictest definition of bear market, the benchmark domestic equity gauge isn’t in one because that requires a decline of at least 20% from the previous high.

Indeed, other assets, indexes and sectors/industries are in bear markets. That includes growth stocks and within that group, communication services, consumer discretionary and technology equities are among this year’s most egregious offenders. Just look at the Nasdaq-100 Index (NDX).

By reasonable metrics, NDX is in a bear market. It’s 26% below its 52-week and down 24% year-to-date. The index allocates about 83% of its weight to three aforementioned sectors. Those sectors’ 2022 struggles are a rapid turnabout from a more than decade-long stretch in which growth absolutely dominated value.

As such, the value-over-growth regime is  catching many clients by surprise and sparking memories of the 2000 tech bubble. Advisors can talk clients off the “tech ledge” because this year’s tech wreck isn’t a redux of 2000. Good things clients have advisors to articulate why that’s the case.

Important Lessons to Be Learned

One important lesson that clients – both young and those that were investing in 2000 – should be reminded off is that the 2022 Nasdaq 100 is far cry from the index seen in the late 1990s.

Sure, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), among other current index components, were around back then. Google parent Alphabet (NASDAQ:GOOG) and Facebook parent Meta Platforms (NASDAQ:FB) were not. Today, however, the Nasdaq 100 is loaded with cash-rich companies, including the aforementioned names. That was not the case 22 years ago.

Obviously, strong balance sheets are enviable traits, but they don’t entirely buffer investors from broad market declines. It also pays to remind clients just how far communication services and tech stocks soared in recent years – gains that indicate the current correction is healthy.

“Yet overall, that pattern holds true for both the broader tech sector and communications services stocks. The tech stock index is still up 72% over the last three years, and communications has gained 21%. During that time the overall market is up 40%,” according to Morningstar, which is referencing its tech and communication services benchmarks in that comment.

As has been widely noted, the primary culprit in the demise of growth stocks this year is rising interest rates. Although many large- and mega-cap growth stocks, including those mentioned here, are generating cash flow today, the broader growth landscape is known for longer-dated cash flows, making it vulnerable to Fed tightening.

“That’s because a key aspect of stock valuations is estimating the present value of a company’s future earnings. Investors use interest rates to discount the value of those future earnings back to today, and higher rates today diminish the value of future earnings,” adds Morningstar. “Meanwhile, fast-growing companies like tech stocks are usually valued on earnings many years, or even decades into the future. They’re known as long-duration stocks.”

Thankfully, Some Good News

Growth stocks usually aren’t inexpensive. That’s just the cost of doing business in this segment, but following the January through May drubbing, a slew of growth stocks are now trading at attractive valuations.

Those include, in alphabetical order, Adobe (NASDAQ:ADBE), Amazon, Facebook Gilead Sciences (NASDAQ:GILD), Intel (NASDAQ:INTC), Meta Platforms and (NYSE:CRM), among others.

“The good news for investors is that means some of these industry leaders are the most undervalued they’ve been in years. Semiconductor giant Nvidia (NVDA) is trading at its largest discount to Morningstar’s fair value estimate in our history of following the stock,” notes Morningstar analyst Jakir Hossain.

The point: Growth isn’t the place to be at the moment, but advisors can help clients identify long-term opportunities in this segment while showing them that 2000 won’t play out again this year.

Related: Value’s Advantage Over Growth Is Simply Stunning