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With a solid mega rally post the March 2020 market crash, the tech sector seems to have entered a strong correction. Analysts say that the sector is currently in the overbought regions and high-valuations of some giant companies are beyond reasonable levels.
On Tuesday, September 8, bears continued to dominate as all three indices entered a major correction being pushed by tech stocks. The Dow Jones (INDEXDJX: .DJI) lost 600 odd points correcting 2.25% while the S&P 500 (INDEXSP: .INX) registered its third consecutive day of correction. The Nasdaq Composite (INDEXNASDAQ: .IXIC) also lost around 500 odd points correcting 4.11% on Tuesday.
The major reason behind this wider market correction has been stock from Wall Street’s favorite technology sector. The tech sector dominated Wall Street for the first-half of 2020. Moreover, it has single-handedly helped Wall Street pull of the market crash of March 2020.
It looks like after a continuos rally during the entire Q2 2020, investors are cashing out their gains. On Tuesday, Apple was leading the correction in tech stocks losing over 6.7%. On closing, Apple Inc (NASDAQ: AAPL) shares were trading at $112 with market valuations dropping below $2 trillion.
Apple having its worst 3-day stretch since October 2008. $AAPL
— Bespoke (@bespokeinvest) September 8, 2020
Microsoft accompanied Apple to the next position losing 5.41% on Monday. Other giants like Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), and Facebook Inc (NASDAQ: FB) lost anywhere between 3-4%. Zoom Video Communications Inc (NASDAQ: ZM) that witnessed a mega rally in 2020, dropped 5.41%, probably its first big drop in 2020. With this, the company valuations also corrected to drop just below the $100-billion milestone.
Market analysts have been already warning about the overbought levels in the tech stocks. The mega rally in the tech space looks to finally cool down, and analysts are expecting a healthy correction in the coming times. Speaking to CNBC, Bruce Bittles, chief investment strategist at Baird, said:
“High valuations in the mega-cap stocks are stretched far beyond historical levels. The technical indicators – high margin debt, fully invested mutual funds, CBOE options data showing record call volume, Wall Street letter writers at bullish levels — pointed to excessive optimism in the market which often suggests a consolidation/correction phase is likely.”
Tech Stocks Are Not in a Bubble
Investors have been worrying that whether the massive surge in valuations has led to another bubble in the tech space. Mark Haefele, chief investment officer at UBS Global Wealth Management, has snubbed-off the worries saying this is just a correction. In a note to investors, Haefele said that latest correction doesn’t signal the end of the rally in the tech space.
“The sector is expensive, but not in a bubble,” he added. As per the analyst, the U.S. tech sector is still “well below levels seen at the height of the dotcom bubble of the late 1990s levels, when the index forward P/E rose above 70x”.
While the market has been giving mixed signals, the concerns related to Coronavirus are nowhere near to its end. On the other hand, the escalating tech war between U.S. and China has kept investors on the edge. While launching its global data security initiative on Tuesday, China accused the United States of bullying.
This comes as the Trump administration continues to put pressure on Chinese tech companies. The U.S. has accused Chinese tech companies of passing crucial information to the Chinese Communist Party (CCP) and sees this as a national security threat.
Following the Coronavirus pandemic, a majority of the top-ten economies have contracted by unprecedented levels. The global economic outlook going further lacks certainty and concerns of the global economic recession still hover around.