Tech Is a Long-Term Bullish Sector: Recent Meltdown Temporary
The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered a huge blow as soon as 2022 started. Soaring inflation since mid-2021 has compelled the Fed to terminate the quantitative easing program and raise the benchmark lending rate earlier than expected. Consequently, the blood bath in the Technology sector is visible in January.
However, we believe the recent meltdown is temporary and the technology sector has vast potential. At this stage, technology bigwigs like NVIDIA Corp. NVDA, QUALCOMM Inc. QCOM, Broadcom Inc. AVGO, Advanced Micro Devices Inc. AMD and Analog Devices Inc. ADI with attractive valuations, should prove beneficial to investors.
Tech Meltdown Temporary
U.S. stock markets routed last week with the Fed raising the tapering of the quantitative easing program and Chairman Jerome Powell’s indication that the central bank will not hesitate to take harsh measures to contain inflation.
Several economists and financial experts have said that markets have already discounted four rate hikes this year of 25 basis points each. However, many market participants have expressed fear that the Fed may raise the benchmark interest rate by 50 basis points that too as early as in March.
A higher market interest rate is detrimental to growth sectors like technology. Consequently, the Technology Select Sector SPDR (XLK), one of the 11 broad sector-specific ETF of the S&P 500 Index has plummeted 10.8% year to date. The tech-heavy Nasdaq Composite has plunged 11.4% year to date.
However, the recent meltdown of the technology sector is a temporary phenomenon. The fundamentals of the technology sector are rock solid. The growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment.
A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost to the overall space.
Tech Has Vast Potential – Buy on the Dip
The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those using smartphones, rarely utilize online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to the digital platforms for their office work (work from home), ordering foods and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.
The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward the digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of the online platforms.
The impact of a higher market interest rate is already factored in the technology sector’s valuation to a large extent. Share prices of several technology behemoths have suffered a blow in January.
These companies have highly established business models spread across the world, strong product pipelines, globally acclaimed brand recognition and robust financial positions, which help them to cope with a higher interest rate.
Moreover, the White House has put pressure on Congress to quickly pass legislation providing $52 billion to help computer chip manufacturers and ease the shortage of the components vital to many industries. This stimulus will benefit chip manufacturers like NVIDIA, QUALCOMM, Broadcom, Advanced Micro Devices and Analog Devices.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Analog Devices, Inc. (ADI) : Free Stock Analysis Report
QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Broadcom Inc. (AVGO) : Free Stock Analysis Report
To read this article on Zacks.com click here.
