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Why Tech is Dominating This Rally Off the June Low
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After a brutal start to the year that saw the Nasdaq drop over 30% from its November peak, the tech-heavy index has come roaring back to life, rallying nearly 20% from the June low. It remains to be seen if that low will mark an official bottom, and whether this is simply a bear market rally or the start of a new bull market. But one thing’s for sure – technology and growth have led the way higher over the past month and a half. Let’s explore a few reasons why this was the case, and why tech will likely continue its outperformance for as long as the rally persists.
This bullish rally has been fueled by countertrend bounces coming from beaten down, oversold stocks. From the beginning of the year through the bottom made on June 16th, the energy sector (depicted by the (XLE - Free Report) ETF) soared higher while growth areas like technology (XLK - Free Report) and consumer discretionary (XLY - Free Report) led the downside:
Image Source: Zacks Investment Research
And since mid-June, it’s been quite the opposite, with energy (XLE - Free Report) lagging and consumer discretionary (XLY - Free Report) and technology (XLK - Free Report) leading the upside:
Image Source: Zacks Investment Research
In addition, the Nasdaq P/E ratio hovered around 20 in May and June of this year, a level not seen since the coronavirus-induced plunged in early 2020. Growth and technology became very oversold, and a correction off that condition ensued.
Image Source: YCharts
Earnings during the second quarter have not been as bad as expected. Eighty percent of information technology companies have beaten earnings estimates, while revenues have grown nearly 8% year-over-year. The fact that many of the big tech companies have held their own in this uncertain, volatile time is a testament to their strength and resilience.
Image Source: FactSet
Lastly, inflation expectations have come down over the past few months. Some inflation is ok, but when high inflation becomes less of a concern, tech stocks tend to rally. This is evident in numerous areas, including energy prices and bond yields. XLE is now in its own bear market, off more than 20% from its peak.
Image Source: StockCharts
Bond yields have also come down substantially off the June highs, as evidenced by the yield on the 10-year note.
Image Source: StockCharts
Technology tends to outperform during bullish cycles, and underperform during bear markets. And that’s exactly what we’ve witnessed throughout the back-and-forth, volatile moves this year.
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Why Tech is Dominating This Rally Off the June Low
After a brutal start to the year that saw the Nasdaq drop over 30% from its November peak, the tech-heavy index has come roaring back to life, rallying nearly 20% from the June low. It remains to be seen if that low will mark an official bottom, and whether this is simply a bear market rally or the start of a new bull market. But one thing’s for sure – technology and growth have led the way higher over the past month and a half. Let’s explore a few reasons why this was the case, and why tech will likely continue its outperformance for as long as the rally persists.
This bullish rally has been fueled by countertrend bounces coming from beaten down, oversold stocks. From the beginning of the year through the bottom made on June 16th, the energy sector (depicted by the (XLE - Free Report) ETF) soared higher while growth areas like technology (XLK - Free Report) and consumer discretionary (XLY - Free Report) led the downside:
Image Source: Zacks Investment Research
And since mid-June, it’s been quite the opposite, with energy (XLE - Free Report) lagging and consumer discretionary (XLY - Free Report) and technology (XLK - Free Report) leading the upside:
Image Source: Zacks Investment Research
In addition, the Nasdaq P/E ratio hovered around 20 in May and June of this year, a level not seen since the coronavirus-induced plunged in early 2020. Growth and technology became very oversold, and a correction off that condition ensued.
Image Source: YCharts
Earnings during the second quarter have not been as bad as expected. Eighty percent of information technology companies have beaten earnings estimates, while revenues have grown nearly 8% year-over-year. The fact that many of the big tech companies have held their own in this uncertain, volatile time is a testament to their strength and resilience.
Image Source: FactSet
Lastly, inflation expectations have come down over the past few months. Some inflation is ok, but when high inflation becomes less of a concern, tech stocks tend to rally. This is evident in numerous areas, including energy prices and bond yields. XLE is now in its own bear market, off more than 20% from its peak.
Image Source: StockCharts
Bond yields have also come down substantially off the June highs, as evidenced by the yield on the 10-year note.
Image Source: StockCharts
Technology tends to outperform during bullish cycles, and underperform during bear markets. And that’s exactly what we’ve witnessed throughout the back-and-forth, volatile moves this year.