Affected by multiple factors such as macroeconomics and elections, the technology sector of the US stock market has experienced significant fluctuations in the past month, leading to increased market concerns. Under the benchmark assumption of a macroeconomic soft landing, combined with our analysis of the GenAI technology wave, the US stock technology sector, and; Based on the analysis of the valuation level of weighted individual stocks, we conclude that the overall risk of the US technology sector is relatively limited. The high volatility in the market mainly comes from excessive concerns about the macro level, aversion to election uncertainty, and the crowded trading structure in the early stage. Reasonable valuation is one of the most important guarantees in the market. Excluding individual heavyweight stocks, the overall valuation of the US technology sector is currently in a reasonable period. Coupled with the steady upward performance cycle of the sector, we continue to maintain an optimistic view of the sector for the next 6-12 months.
US tech stocks: Multiple factors intertwined, with significant fluctuations in recent times.
In the past month and a half, the performance of the US stock market has fluctuated greatly, with multiple factors affecting the market including the mid year report season, expectations of interest rate cuts, the US presidential election, macro recession concerns, and the reversal of yen carry trades. The market has also begun to consider the possibility of the end of the bull market in the US technology sector over the past year. We have found that from the high point in mid July to the low point on August 7th, the SOX (Philadelphia Semiconductor), Nasdaq, and S&P indices have cumulatively fallen by 27%, 14%, and 8%. With the release of relatively good PMI and employment data in the past two weeks, the market has gradually recovered from concerns about macro recession in the early stage. As of August 16th, the SOX, Nasdaq, and S&P indices have rebounded 13%, 8%, and 6% from their lows.
The root causes of market volatility include macro, election, AI, trading structure, etc.
1) Macro: The Federal Reserve's "data dependent" monetary policy path, coupled with the high volatility and unpredictability of short-term macro data, makes the market extremely sensitive to small changes in short-term macro data. Since the beginning of this year, the US stock market has traded macro situations such as downward inflation, stagflation, and economic recession;
2) Election: The anxiety of the election situation, coupled with the two parties' involvement in foreign trade and; Tariffs, Internal Taxes& The vastly different policy proposals at the level of industrial regulation have objectively increased market volatility;
3) AI: Faced with sustained massive CAPEX investments, the market is paying more attention to the specific progress of enterprise AI applications and the ROIC rationality of AI related CAPEX investments;
4) Transaction Structure: Over the past two years, technology giants, semiconductors, and; Hardware stands out, and the market is highly consistent and crowded in terms of trading direction and position structure. The low volatility of the market also leads to the accumulation of arbitrage positions across markets and asset classes.
The main contradictions in the current market are macro recession risk, concerns about AI sustainability, valuation level, etc.
At present, there are major differences in the market regarding US technology stocks; Concerns are focused on macroeconomic recession, the collapse of the AI technology wave, and overvalued sectors.
1) Macro concerns, combined with the second quarter reports and subsequent prospects of major US stock companies, indicate that a slowdown in economic growth and a soft landing are still the most likely scenarios at present. At the same time, compared to the past, the current benchmark interest rate of 5.25% by the Federal Reserve can also provide sufficient policy space;
2) The sustainability of AI, we judge that in the next 2-3 years, the global investment in AI computing power will still be sustainable. In the long run, it is necessary to solve the business cycle between upstream CAPEX investment and downstream application output of AI, which depends on the observation and verification of a series of core events (Special Report "Forward looking Research on Industry US Semiconductor&Hardware Special Report - How to View the Recent Adjustment of US Semiconductor and AI Computing Power", July 31, 2024);
3) At present, the valuation levels of the S&P 500 and SOX index PE (NTM) are 22.5X and 29.4X, respectively, which are higher than the average of the past decade (18.5X and 19.2X). We believe that this is mainly influenced by individual heavyweight stocks.
Valuation of the US technology sector: Overall in a reasonable period.
Based on the financial forecasting model of the Forward looking Group of CITIC Securities Research Department, we analyzed the valuation data of US stock technology giants, semiconductor hardware, and software SaaS sectors from bottom to top.
Risk factors:
The risk of unexpected economic recession in Europe and America; The uncertainty risk of the US presidential election; The risk of escalating global geopolitical conflicts; The risk of continuous tightening of regulation in the technology industry; The risk of AI technology progress falling short of expectations; Key technologies of enterprises, risks of talent loss, etc.
Investment advice:
Under the benchmark assumption of a macroeconomic soft landing, combined with our analysis of the AI technology wave, the US stock technology sector, and; Analysis of the Valuation Level of Weighted Stocks; Discussion: We conclude that the overall risk of the US technology sector is relatively limited, and the high volatility in the market mainly comes from excessive concerns about the macro level, aversion to election uncertainty, and crowded trading structures in the early stages. Reasonable valuation is one of the most important guarantees in the market. Excluding individual heavyweight stocks, the overall valuation of the US technology sector is currently in a reasonable period. Coupled with the steady upward performance cycle of the sector, we continue to maintain an optimistic view of the sector for the next 6-12 months.